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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 13, 2001
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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MERCANTILE BANK CORPORATION
MICHIGAN 38-3360865
(STATE OR OTHER JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER IDENTIFICATION NO.)
ORGANIZATION)
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216 NORTH DIVISION AVENUE
GRAND RAPIDS, MICHIGAN 49503
(616) 242-9000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
GERALD R. JOHNSON, JR.
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
216 NORTH DIVISION AVENUE
GRAND RAPIDS, MICHIGAN 49503
(616) 242-9000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
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COPY TO:
JEROME M. SCHWARTZ JENNIFER R. EVANS
DICKINSON WRIGHT PLLC VEDDER, PRICE, KAUFMAN & KAMMHOLZ
500 WOODWARD AVENUE, 222 NORTH LASALLE STREET,
SUITE 4000 SUITE 2600
DETROIT, MICHIGAN 48226 CHICAGO, ILLINOIS 60601
(313) 223-3628 (312) 609-7686
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [ ]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
TITLE OF EACH CLASS OF MAXIMUM MAXIMUM AMOUNT OF
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
REGISTERED REGISTERED PER SHARE OFFERING PRICE FEE
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common stock (no par value).......... 1,380,000 shares(1) $16.90(2) $23,322,000 $5,831
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(1) Includes 180,000 shares of common stock, which may be purchased by the
Underwriters to cover over-allotments.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c), based on the average of the high and low prices of
the common stock, $16.80 and $17.00, as reported by the Nasdaq National
Market, on July 12, 2001.
WE HEREBY AMEND THIS REGISTRATION STATEMENT ON THE DATE OR DATES AS MAY BE
NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL WE SHALL FILE A FURTHER AMENDMENT
WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER
BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933
OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON THE DATE AS THE
SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SECTION 8(A) OF THE
SECURITIES ACT OF 1933, MAY DETERMINE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE CANNOT
SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL
THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY
STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED JULY 13, 2001
PROSPECTUS
1,200,000 SHARES
MERCANTILE BANK CORPORATION
[MERCANTILE LOGO] COMMON STOCK
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Mercantile Bank Corporation is offering 1,200,000 shares of common stock.
Our common stock is quoted on the Nasdaq National Market under the symbol
"MBWM." On July 12, 2001, the last reported sale price of our common stock as
reported on the Nasdaq National Market was $16.80 per share.
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INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING
ON PAGE 7.
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THE SHARES OF COMMON STOCK BEING OFFERED ARE NOT SAVINGS ACCOUNTS, DEPOSITS
OR OBLIGATIONS OF ANY BANK AND ARE NOT INSURED BY THE BANK INSURANCE FUND OF THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
PER SHARE TOTAL
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Public offering price....................................... $ $
Underwriting discount....................................... $ $
Proceeds to Mercantile Bank Corporation..................... $ $
This is a firm commitment underwriting. The underwriters have been granted
a 30-day option to purchase up to an additional 180,000 shares of common stock
to cover over-allotments, if any.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
STIFEL, NICOLAUS & COMPANY
INCORPORATED
HOWE BARNES INVESTMENTS, INC.
TUCKER ANTHONY SUTRO
CAPITAL MARKETS
, 2001
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MERCANTILE BANK CORPORATION
[MAP]
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PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information and consolidated financial statements and related notes appearing
elsewhere in this prospectus. Unless otherwise noted, all information in this
prospectus assumes that the underwriters will not exercise the option to
purchase additional shares to cover over-allotments from us in the offering.
Unless the text clearly suggests otherwise, references in this prospectus to
"us," "we," "our," or "the company" include Mercantile Bank Corporation and its
wholly-owned subsidiaries. These subsidiaries include Mercantile Bank of West
Michigan, which we sometimes refer to as "our bank," and Mercantile Bank
Mortgage Company, which we sometimes refer to as "our mortgage company."
This prospectus contains forward-looking statements. The outcome of the
events described in these forward-looking statements is subject to risks and
actual results could differ materially. The sections entitled "Forward-Looking
Statements," "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and "Business" contain a discussion of
some of the factors that could contribute to those differences.
MERCANTILE BANK CORPORATION
We are a single bank holding company headquartered in Grand Rapids,
Michigan that provides commercial and retail banking services primarily to
small- to medium-sized businesses based in and around Grand Rapids. Through our
bank subsidiary, Mercantile Bank of West Michigan, we serve principally the Kent
and Ottawa Counties of western Michigan. We formed Mercantile Bank Mortgage
Company, a wholly owned subsidiary of our bank, in October 2000 to increase the
profitability and efficiency of our bank's mortgage loan function. At June 30,
2001, we had total assets of $617.9 million, loans of $508.1 million, deposits
of $520.2 million and shareholders' equity of $40.4 million.
GROWTH HISTORY
We have grown significantly since our bank opened in December 1997. We
posted our first profit in the third quarter of 1998, only nine months after our
bank opened. Since inception, management has focused on achieving profitable
internal growth while maintaining strong asset quality. At June 30, 2001, our
assets exceeded $600.0 million and our non-performing loans were 0.03% of loans.
A number of factors have contributed to our growth:
- our experienced management team has extensive long-term relationships and
a strong reputation within the western Michigan business community;
- a track record of customer attentiveness and responsive service;
- achieving the size and visibility to be a major competitor for commercial
loans in our markets; and
- over the past four years, the Grand Rapids financial services market has
undergone continued market disruption as the largest local banks have
been acquired by out-of-state institutions.
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We believe the combination of these factors has contributed to our strong
historical performance and will provide significant opportunities for continued
growth and profitability.
FINANCIAL SUMMARY
We have maintained strong asset quality while continuing to internally grow
our organization. The table below presents selected operating and financial
highlights:
AS OF OR FOR THE
SIX MONTHS ENDED AS OF OR FOR THE
JUNE 30, YEARS ENDED DECEMBER 31,
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2001 2000 2000 1999 1998 1997(5)
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(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Total revenue(1).............. $ 7,934 $ 6,291 $ 13,467 $ 10,284 $ 5,027 $ 140
Diluted earnings (loss) per
share....................... 0.58 0.44 1.07 0.80 (0.55) (0.26)
Total assets.................. 617,888 440,317 512,746 368,037 216,237 24,109
Loans......................... 508,111 374,986 429,804 308,006 184,745 12,887
Deposits(2)................... 520,222 361,613 425,740 294,829 171,998 9,688
Shareholders' equity.......... 40,447 29,239 31,854 27,968 26,701 13,473
Efficiency ratio(3)........... 54.64% 58.52% 55.80% 57.25% 70.90% NM
Return on average
shareholders' equity(4)..... 9.18 8.02 9.48 7.70 (6.40) (30.90)
Net charge-offs to average
loans(4).................... 0.01 0.01 0.05 0.04 0.00 0.00
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(1) Total revenue is defined as net interest income plus non-interest income.
(2) Includes out-of-area CDs.
(3) Non-interest expense divided by the sum of net interest income plus
non-interest income.
(4) Annualized for interim periods.
(5) As we were incorporated in 1997, the 1997 period is from July 15, 1997 (date
of inception) through December 31, 1997.
- - Our earnings per share increased 31.8% for the six-month period ended June 30,
2001 over the same period in 2000, and 33.8% for the fiscal year ended 2000
compared to the fiscal year ended 1999.
- - Our total revenues increased 26.1% for the six-month period ended June 30,
2001 over the same period in 2000, and 31.0% for the fiscal year ended 2000
compared to the fiscal year ended 1999.
- - Our loans have grown 35.5% ($133.1 million) for the twelve-month period ended
June 30, 2001.
- - Our ratio of net charge-offs to average loans has averaged 0.03% over the last
three fiscal years ended December 31, 2000, and was 0.01% for the six-month
period ended June 30, 2001.
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OPERATING STRATEGY
The key elements of our operating strategy are presented below.
FOCUS ON LOCALLY-OWNED AND OPERATED BUSINESSES. Our lending activities
focus primarily on providing local businesses with commercial business loans and
loans secured by owner-occupied real estate. Typically, we seek commercial
lending relationships with customers borrowing from $250,000 to $6.0 million.
Our legal lending limit was approximately $12.0 million as of June 30, 2001, and
this limit accommodates the vast majority of credit opportunities we encounter.
If local businesses have credit needs beyond the scope of our lending capacity,
we will often look to participate out a portion of the credit with other
financial institutions in order to accommodate our customers' needs. As of June
30, 2001, we had six relationships borrowing more than $5.0 million from our
bank.
EMPLOYING FEWER, BUT HIGHLY QUALIFIED AND PRODUCTIVE INDIVIDUALS AND
FOCUSING ON LOW NET OVERHEAD RATIOS. Key to our growth and profitability is our
management's extensive experience in providing community banking services and
our ability to create a culture committed to both proactive sales and
disciplined credit quality. Our practice of employing fewer, but highly
qualified and productive individuals at all levels of the organization is key to
maintaining a decentralized management structure. These individuals are able to
manage large loan portfolios, which increases interest income while controlling
personnel costs. Our commercial lending focus allows us to generate larger
relationships than a retail focus would allow, which permits us to accelerate
asset growth with fewer resources. We believe our organizational structure and
loan focus will allow us to continue to improve and maintain our favorable net
overhead ratios as our bank matures.
OPERATING A LIMITED NUMBER OF OFFICES WITH A HIGH ASSET BASE PER
OFFICE. We currently have two full-service branches and plan to open a third in
the fall of 2001. We actively solicit local deposits to fund our asset growth.
We grew our local deposit base 29.8% in 2000 and 20.3% in the first six months
of 2001. However, our loan portfolio has increased faster than our local
deposits. Because of this, our strategy is to garner out-of-area CDs from across
the country at rates similar to our local deposit market in order to help fund
our growth. Our ability to attract adequate funding with minimal branching
allows us to grow at a lower overhead cost. We plan to continue using
out-of-area deposits because we believe that this source of funds gives us an
efficiency advantage in our market.
MAINTAINING STRONG ASSET QUALITY. Equally important as our growth is our
emphasis on the quality of our loan portfolio and the adequacy of our reserves.
Since opening, our ratio of annual net charge-offs to average loans has never
been greater than 0.05%, and for the six-months ended June 30, 2001 our ratio
was 0.01%. Our ratio of non-performing loans to loans was 0.03% at June 30,
2001. In addition to controlling provision expense, we believe that strong asset
quality leads to greater operating performance because it minimizes the time and
money spent managing problem assets. At the same time we understand the risks
associated with our loan portfolio and maintain a loan loss reserve that we
believe is appropriate. At June 30, 2001 our ratio of allowance for loan losses
to total loans was 1.47%.
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MARKET AREA
Our market area is the Kent and Ottawa Counties of western Michigan,
including the City of Grand Rapids, the second largest city in the State of
Michigan. Kent County, which encompasses most of the Grand Rapids metropolitan
area, has a diverse economy based primarily on manufacturing, retail and service
businesses. Statistically, Kent County has approximately 554,000 people, 200,000
households and a median household income that is estimated to have grown
approximately 65% from 1990 to 2000. Kent County is a significant banking market
in the State of Michigan. According to available industry data, as of June 30,
2000, total deposits in Kent County, including those of banks and thrifts, were
approximately $8.5 billion.
Our principal executive offices are located at 216 North Division Avenue,
Grand Rapids, Michigan. Our telephone number is (616) 242-9000.
THE OFFERING
Common stock offered by
Mercantile Bank Corporation..... 1,200,000 shares
Offering price per share........ $
Common stock to be outstanding
after this offering........... 4,312,702 shares(1)
Use of proceeds................. We intend to use the net proceeds from this
offering to increase our capital position in
anticipation of future growth, and for other
general corporate purposes. Promptly
following the completion of this offering,
we intend to contribute substantially all of
the net proceeds to our bank to increase its
capital position.
Cash dividends.................. We have not paid cash dividends on our
common stock since our formation in 1997,
and we currently have no intention of doing
so in the foreseeable future.
Risk factors.................... See "Risk Factors" beginning on page 7 and
other information included or incorporated
by reference in this prospectus for a
discussion of factors you should consider
carefully before deciding to invest in our
common stock.
Nasdaq National Market Symbol... MBWM.
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(1) The number of shares to be outstanding after this offering excludes 166,526
shares issuable upon the exercise of outstanding employee stock options.
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SELECTED CONSOLIDATED FINANCIAL DATA
The following table summarizes our selected consolidated financial
information and other financial data. The selected balance sheet and statement
of income data, insofar as they relate to the years ended December 31, 2000,
1999, 1998 and 1997 are derived from our consolidated financial statements,
which have been audited by Crowe, Chizek and Company LLP. The selected
consolidated financial data as of and for the six-month periods ended June 30,
2001 and 2000 are derived from unaudited consolidated financial statements. In
our opinion, all adjustments, consisting solely of normal recurring adjustments,
necessary for a fair presentation of results as of and for the six-month periods
ended June 30, 2001 and 2000 have been included. This information should be read
together with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our consolidated financial statements and the related
notes included elsewhere in this prospectus. Results for past periods are not
necessarily indicative of results that may be expected for any future period,
and results for the six-month period ended June 30, 2001 are not necessarily
indicative of results that may be expected for the full year ending December 31,
2001.
AS OF OR FOR THE
SIX MONTHS ENDED
JUNE 30, AS OF OR FOR THE YEAR ENDED DECEMBER 31,
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2001 2000 2000 1999 1998 1997(4)
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(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SUMMARY OF INCOME:
Interest income........... $ 21,866 $ 16,712 $ 36,835 $ 22,766 $ 10,168 $ 154
Interest expense.......... 14,707 10,911 24,560 13,330 5,629 14
--------- --------- --------- --------- --------- ---------
Net interest income....... 7,159 5,801 12,275 9,436 4,539 140
Provision for loan
losses.................. 1,180 945 1,854 1,961 2,572 193
Non-interest income....... 775 489 1,192 848 488 0
Non-interest expenses..... 4,335 3,681 7,515 5,888 3,564 351
--------- --------- --------- --------- --------- ---------
Income (loss) before
income taxes............ 2,419 1,665 4,098 2,393 (1,109) (404)
Federal income tax
expense................. 727 528 1,303 292 0 0
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Net income (loss)......... $ 1,692 $ 1,137 $ 2,795 $ 2,101 $ (1,109) $ (404)
========= ========= ========= ========= ========= =========
COMMON SHARE DATA:
Diluted earnings (loss)
per share............... $ 0.58 $ 0.44 $ 1.07 $ 0.80 $ (0.55) $ (0.26)
Book value per share...... 12.99 11.26 12.24 10.74 10.26 8.58
Cash dividends per
share................... 0.00 0.00 0.00 0.00 0.00 0.00
Weighted average common
and common equivalent
shares-diluted.......... 2,944,345 2,596,125 2,603,331 2,623,729 2,003,018 1,569,750
BALANCE SHEET DATA:
Total assets.............. $ 617,888 $ 440,317 $ 512,746 $ 368,037 $ 216,237 $ 24,109
Loans..................... 508,111 374,986 429,804 308,006 184,745 12,887
Allowance for loan
losses.................. 7,462 5,527 6,302 4,620 2,765 193
Total securities.......... 67,625 49,271 60,457 41,957 24,160 2,998
Deposits.................. 520,222 361,613 425,740 294,829 171,998 9,688
Trust preferred
securities.............. 16,000 16,000 16,000 16,000 0 0
Shareholders' equity...... 40,447 29,239 31,854 27,968 26,701 13,473
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AS OF OR FOR THE
SIX MONTHS ENDED
JUNE 30, AS OF OR FOR THE YEAR ENDED DECEMBER 31,
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2001 2000 2000 1999 1998 1997(4)
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SELECTED PERFORMANCE RATIOS:
Return on average
assets(1)............... 0.61% 0.55% 0.63% 0.71% (0.86)% (21.78)%
Return on average
shareholders'
equity(1)............... 9.18 8.02 9.48 7.70 (6.40) (30.94)
Net interest margin (tax
equivalent)(1)(2)....... 2.73 2.95 2.90 3.30 3.61 NM
Efficiency ratio(3)....... 54.64 58.52 55.80 57.25 70.90 NM
ASSET QUALITY RATIOS:
Non-performing loans to
total loans............. 0.03% 0.03% 0.02% 0.00% 0.00% 0.00%
Non-performing assets to
total assets............ 0.03 0.03 0.02 0.00 0.00 0.00
Allowance for loan losses
to non-performing
loans................... 4,288.51 4,605.83 2,325.46 NA NA NA
Allowance for loan losses
to total loans.......... 1.47 1.47 1.47 1.50 1.50 1.50
Net charge-offs to average
loans(1)................ 0.01 0.01 0.05 0.04 0.00 0.00
LIQUIDITY AND CAPITAL
RATIOS:
Average loans to average
deposits................ 99.06% 101.99% 102.03% 101.68% 103.30% 91.22%
Total shareholders' equity
to total assets......... 6.55 6.64 6.21 7.60 12.35 55.88
Tier 1 leverage capital
ratio(5)................ 9.26 9.30 8.59 10.88 13.83 69.72
Tier 1 risk-based capital
ratio................... 9.11 9.30 8.59 10.64 11.79 77.04
Total risk-based capital
ratio................... 10.82 12.00 10.97 13.67 13.01 78.12
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(1) Certain financial ratios for interim periods have been annualized.
(2) Net interest income divided by average interest-earning assets.
(3) Non-interest expense divided by the sum of net interest income plus
non-interest income.
(4) We were incorporated in 1997. The 1997 period is from July 15, 1997 (date
of inception) through December 31, 1997.
(5) The Tier 1 leverage ratio is Tier 1 capital divided by average quarterly
assets, after deducting intangible assets and net deferred tax assets in
excess of regulatory maximum limits.
NM Not meaningful.
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RISK FACTORS
Investing in our common stock involves risks. You should carefully consider
the following risk factors before you decide to buy our common stock. You should
also consider other information in this prospectus, as well as in the other
documents incorporated by reference into this prospectus. If any of these risks
actually occur, our business could be adversely affected, the trading price of
our common stock could decline, and you could lose all or a part of your
investment.
CHANGES IN ECONOMIC CONDITIONS OR INTEREST RATES MAY NEGATIVELY AFFECT OUR
EARNINGS, CAPITAL AND LIQUIDITY.
The results of operations for financial institutions, including our bank,
may be materially and adversely affected by changes in prevailing local and
national economic conditions, including declines in real estate market values,
rapid increases or decreases in interest rates and changes in the monetary and
fiscal policies of the federal government. Our profitability is heavily
influenced by the spread between the interest rates we earn on investments and
loans and the interest rates we pay on deposits and other interest-bearing
liabilities. Substantially all our loans are to businesses and individuals in
western Michigan, and any decline in the economy of this area could adversely
affect us. Like most banking institutions, our net interest spread and margin
will be affected by general economic conditions and other factors that influence
market interest rates and our ability to respond to changes in these rates. At
any given time, our assets and liabilities will be such that they will be
affected differently by a given change in interest rates.
OUR CREDIT LOSSES COULD INCREASE AND OUR ALLOWANCE FOR LOAN LOSSES MAY NOT
BE ADEQUATE TO COVER ACTUAL LOAN LOSSES.
The risk of nonpayment of loans is inherent in all lending activities, and
nonpayment, if it occurs, may have a materially adverse effect on our earnings
and overall financial condition as well as the value of our common stock. Our
focus on commercial lending may result in a larger concentration of loans to
small businesses. As a result, we may assume greater lending risks than other
banks. Also, many of our loans have been made recently, and in certain
circumstances there is limited repayment history against which we can fully
assess the adequacy of the allowance for loan losses. We make various
assumptions and judgements about the collectibility of our loan portfolio and
provide an allowance for potential losses based on several factors. If our
assumptions are wrong, our allowance for loan losses may not be sufficient to
cover our losses, which would have an adverse affect on our operating results.
While we have not experienced any significant charge-offs or had large numbers
of nonperforming loans, due to the significant increase in loans originated
since we began operations, we cannot assure you that we will not experience an
increase in delinquencies and losses as these loans continue to mature. The
actual amount of future provisions for loan losses cannot be determined at this
time and may exceed the amounts of past provisions. Additions to our allowance
for loan losses decrease our net income.
WE RELY HEAVILY ON OUR MANAGEMENT AND OTHER KEY PERSONNEL, AND THE LOSS OF
ANY OF THEM MAY ADVERSELY AFFECT OUR OPERATIONS.
We are and will continue to be dependent upon the services of our
management team, including Gerald R. Johnson, Jr., our Chairman and Chief
Executive Officer, Michael H. Price, our President and Chief Operating Officer,
and our other senior managers. The loss of either Mr. Johnson or Mr. Price, or
any of our other senior managers, could have an adverse affect on our growth and
performance. We have entered into employment contracts
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with Mr. Johnson and Mr. Price and two other senior managers. The contracts
provide for a three year employment period that is extended for an additional
year each year unless a notice is given indicating that the contract will not be
extended. We presently maintain policies of key man life insurance on the lives
of Mr. Johnson and Mr. Price in the amount of $1 million each.
In addition, we will continue to depend on our ability to retain our key
loan officers. Our success can be attributed in large part to the relationships
these officers as well as members of our management team have developed and are
able to maintain with our customers as we continue to implement our community
banking philosophy.
DECLINE IN THE AVAILABILITY OF OUT-OF-AREA DEPOSITS COULD CAUSE LIQUIDITY
OR INTEREST RATE MARGIN CONCERNS, OR LIMIT OUR GROWTH.
We have utilized out-of-area or wholesale deposits to support our asset
growth. These deposits are generally a lower cost source of funds when compared
to the interest rates that we would have to offer in our local market to
generate a commensurate level of funds. In addition, the overhead costs
associated with wholesale deposits are considerably less than the overhead costs
we would incur to administer a similar level of local deposits. A decline in the
availability of these wholesale deposits would require us to fund our growth
with more costly funding sources, which could reduce our net interest margin,
limit our growth, reduce our asset size, or increase our overhead costs.
FUTURE SALES OF OUR COMMON STOCK OR OTHER SECURITIES MAY DILUTE THE VALUE
OF OUR COMMON STOCK.
In many situations, our Board of Directors has the authority, without any
vote of our shareholders, to issue shares of our authorized but unissued stock,
including shares authorized but unissued under our stock option plans. In the
future, we may issue additional securities, through public or private offerings,
in order to raise additional capital. Any such issuance would dilute the
percentage of ownership interest of existing shareholders and may dilute the per
share book value of the common stock. In addition, option holders may exercise
their options at a time when we would otherwise be able to obtain additional
equity capital on more favorable terms.
The sale, or availability for sale, of a substantial number of shares of
common stock in the public market as a result of or following this offering
could adversely affect the price of our common stock and could impair our
ability to raise additional capital through the sale of equity securities.
OUR GROWTH AND EXPANSION MAY BE LIMITED BY MANY FACTORS.
We have pursued and intend to continue to pursue an internal growth
strategy, the success of which will depend primarily on generating an increasing
level of loans and deposits at acceptable risk and interest rate levels without
corresponding increases in non-interest expenses. There can be no assurance that
we will be successful in continuing our growth strategies due to delays and
other impediments resulting from regulatory oversight, limited availability of
qualified personnel, or unavailability of branch sites. In addition, the success
of our growth strategy will depend on maintaining sufficient regulatory capital
levels and on continued favorable economic conditions in our market area.
In addition, we may acquire banks, related businesses or branches of other
financial institutions that we believe provide a strategic fit with our
business. To the extent that we grow through acquisitions, we cannot assure you
that we will be able to adequately or
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profitably manage this growth. Acquiring other banks, businesses, or branches
involves risks commonly associated with acquisitions, including:
- exposure to unknown or contingent liabilities of banks, businesses, or
branches we acquire;
- exposure to asset quality issues of the acquired banks, businesses or
branches;
- difficulty and expense of integrating the operations and personnel of
banks, businesses, or branches we acquire;
- potential disruption to our business;
- potential diversion of our management's time and attention;
- the possible loss of key employees and customers of the banks,
businesses, or branches we acquire; and
- the need for financial reporting purposes to record and amortize core
deposit premiums.
OUR FUTURE SUCCESS IS DEPENDENT ON OUR ABILITY TO COMPETE EFFECTIVELY IN
THE HIGHLY COMPETITIVE BANKING INDUSTRY.
We face substantial competition in all phases of our operations from a
variety of different competitors. Our future growth and success will depend on
our ability to compete effectively in this highly competitive environment. We
compete for deposits, loans and other financial services with numerous
Michigan-based and out-of-state banks, thrifts, credit unions and other
financial institutions as well as other entities that provide financial
services. Some of the financial institutions and financial service organizations
with which we compete are not subject to the same degree of regulation as we
are. Most of our competitors have been in business for many years, have
established customer bases, are larger, have substantially higher lending limits
than we do and offer branch networks and other services which we do not,
including, brokerage, insurance, trust, mutual fund and international banking
services. Most of these entities have greater capital resources than we do,
which, among other things, may allow them to price their services at levels more
favorable to the customer and to provide larger credit facilities than we do.
This competition may limit our growth or earnings. Under the Gramm-Leach-Bliley
Act of 1999, effective March 11, 2000, securities firms and insurance companies
that elect to become financial holding companies may acquire banks and other
financial institutions. The Gramm-Leach-Bliley Act may significantly change the
competitive environment in which we conduct business. The financial services
industry is also likely to become more competitive as further technological
advances enable more companies to provide financial services. These
technological advances may diminish the importance of depository institutions
and other financial intermediaries in the transfer of funds between parties.
WE ARE SUBJECT TO SIGNIFICANT GOVERNMENT REGULATION, AND ANY REGULATORY
CHANGES MAY ADVERSELY AFFECT US.
The banking industry is heavily regulated under both federal and state law.
These regulations are primarily intended to protect customers, not our creditors
or shareholders. Existing state and federal banking laws subject us to
substantial limitations with respect to the making of loans, the purchase of
securities, the payment of dividends and many other aspects of our business.
Some of these laws may benefit us, others may increase our costs
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of doing business, or otherwise adversely affect us and create competitive
advantages for others. Regulations affecting banks and financial services
companies undergo continuous change, and we cannot predict the ultimate effect
of these changes, which could have a material adverse effect on our
profitability or financial condition. Federal economic and monetary policy may
also affect our ability to attract deposits, make loans and achieve satisfactory
interest spreads.
WE CONTINUALLY ENCOUNTER TECHNOLOGICAL CHANGE, AND WE MAY HAVE FEWER
RESOURCES THAN OUR COMPETITORS TO CONTINUE TO INVEST IN TECHNOLOGICAL
IMPROVEMENTS.
The banking industry is undergoing technological changes with frequent
introductions of new technology-driven products and services. In addition to
better serving customers, the effective use of technology increases efficiency
and enables financial institutions to reduce costs. Our future success will
depend, in part, on our ability to address the needs of our customers by using
technology to provide products and services that will satisfy customer demands
for convenience as well as creating additional efficiencies in our operations.
Many of our competitors have substantially greater resources to invest in
technological improvements. There can be no assurance that we will be able to
effectively implement new technology-driven products and services or be
successful in marketing these products and services to our customers.
OUR ARTICLES OF INCORPORATION AND BY-LAWS AND THE LAWS OF MICHIGAN CONTAIN
PROVISIONS THAT COULD MAKE A TAKEOVER MORE DIFFICULT.
Our Articles of Incorporation and By-laws, and the corporate laws of the
State of Michigan, include provisions which are designed to provide our board of
directors with time to consider whether a hostile takeover offer is in our
company's and shareholders' best interest. These provisions, however, could
discourage potential acquisition proposals and could delay or prevent a change
in control. The provisions also could diminish the opportunities for a holder of
our common stock to participate in tender offers, including tender offers at a
price above the then-current market price for our common stock. These provisions
could also prevent transactions in which our shareholders might otherwise
receive a premium for their shares over then-current market prices, and may
limit the ability of our shareholders to approve transactions that they may deem
to be in their best interests.
The Michigan Business Corporation Act contains provisions intended to
protect shareholders and prohibit or discourage various types of hostile
takeover activities. In addition to these provisions and the provisions of our
Articles of Incorporation and By-laws, federal law requires the Federal Reserve
Board's approval prior to acquisition of "control" of a bank holding company.
All of these provisions may have the effect of delaying or preventing a change
in control without action by our shareholders, and could adversely affect the
price of our common stock.
THERE IS A LIMITED TRADING MARKET FOR OUR COMMON STOCK.
The price of our common stock subject to this offering may be greater than
the market price for our common stock following the offering. Our common stock
is quoted on the Nasdaq National Market under the symbol "MBWM". The development
and maintenance of an active public trading market depends upon the existence of
willing buyers and sellers, the presence of which is beyond our control. While
we are a publicly-traded company, the volume of trading activity in our stock is
still relatively limited. Even if a more active market develops, there can be no
assurance that such a market will continue, or that our shareholders will be
able to sell their shares at or above the offering price.
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USE OF PROCEEDS
We estimate that we will receive net proceeds of approximately $ million
from the sale of 1,200,000 shares of our common stock in this offering, at a
public offering price of $ per share, after deducting the underwriting
discount and commissions and estimated offering expenses of approximately
$212,000 payable by us. If the underwriters' over-allotment option is exercised
in full, we estimate that our net proceeds will be approximately $ million.
We intend to use the net proceeds from this offering to increase our
capital position in anticipation of future growth, and for other general
corporate purposes. Promptly following the completion of this offering, we
intend to contribute substantially all of the net proceeds to our bank to
increase its capital position.
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CAPITALIZATION
The following table sets forth our indebtedness and capitalization at June
30, 2001:
- on an actual basis; and
- on an adjusted basis to give effect to the offering, as if the sale of
the shares of our common stock being offered had been consummated on June
30, 2001.
These data should be read in conjunction with our consolidated financial
statements and the related notes included elsewhere in this prospectus.
JUNE 30, 2001
----------------------
ACTUAL AS ADJUSTED
------- -----------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
SHORT-TERM INDEBTEDNESS:
Short-term borrowings (including securities sold under
agreement to repurchase and federal funds
purchased)........................................... $34,899 $34,899
======= =======
LONG-TERM INDEBTEDNESS:
Guaranteed preferred beneficial interests in the
Corporation's subordinated debentures................ 16,000 16,000
------- -------
SHAREHOLDERS' EQUITY:
Preferred stock, no par value; 1,000,000 shares
authorized, none issued.............................. 0 0
Common stock, no par value; 9,000,000 shares authorized;
3,112,702 shares issued and outstanding; 4,312,702
shares issued and outstanding as adjusted............ 36,684
Retained earnings....................................... 3,320 3,320
Accumulated other comprehensive income.................. 443 443
------- -------
Total shareholders' equity........................... 40,447
------- -------
Total capitalization(1).............................. $56,447 $
======= =======
CAPITAL RATIOS:
Total shareholders' equity to total assets.............. 6.55% %
Tier 1 leverage capital ratio(2)........................ 9.26
Tier 1 risk-based capital ratio......................... 9.11
Total risk-based capital ratio.......................... 10.82
- -------------------------
(1) Includes shareholders' equity and long-term indebtedness.
(2) The Tier 1 leverage ratio is Tier 1 capital divided by average quarterly
assets, after deducting intangible assets and net deferred tax assets in
excess of regulatory maximum limits.
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MARKET FOR COMMON STOCK
Our common stock is quoted on the Nasdaq National Market under the symbol
MBWM. Prior to July 19, 1999, our common stock was quoted on the OTC Bulletin
Board under the same symbol. At July 2, 2001, there were 124 record holders of
our common stock. In addition, we estimate that there were approximately 1,900
beneficial owners of our common stock who own their shares through brokers or
banks.
The following table shows the high and low bid prices by quarter during
2000 and 1999, and for the first three quarters of 2001 through the date
indicated. The quotations reflect bid prices as reported by the OTC Bulletin
Board through July 18, 1999, and as reported by the Nasdaq National Market on
and after July 19, 1999. The over-the-counter market quotations reflect
inter-dealer prices and do not include retail mark-up, mark-down or commission,
and may not necessarily represent actual transactions. All prices have been
adjusted for the 5% stock dividend we paid on February 1, 2001. On July 12,
2001, the closing sale price of our common stock was $16.80.
HIGH LOW
------ ------
2001
First Quarter............................................... $16.00 $11.50
Second Quarter.............................................. 17.55 14.76
Third Quarter (through July 12, 2001)....................... 17.80 16.67
2000
First Quarter............................................... $12.35 $ 9.50
Second Quarter.............................................. 10.45 8.79
Third Quarter............................................... 11.76 8.91
Fourth Quarter.............................................. 12.35 10.57
1999
First Quarter............................................... $16.63 $12.35
Second Quarter.............................................. 15.79 12.35
Third Quarter............................................... 15.20 13.30
Fourth Quarter.............................................. 14.73 11.64
DIVIDEND POLICY
On January 10, 2001, we declared a 5% stock dividend on our common stock,
payable on February 1, 2001 to record holders as of January 19, 2001. We have
not paid cash dividends on our common stock since our formation in 1997, and we
currently have no intention of doing so in the foreseeable future. We are a
holding company and substantially all of our assets are held by our
subsidiaries. Our ability to pay dividends to our shareholders, if we determine
in the future to do so, will depend primarily on our bank's ability to pay
dividends to us. Dividend payments and extensions of credit to us from our bank
are subject to legal and regulatory limitations, generally based on capital
levels and current and retained earnings imposed by law and regulatory agencies
with authority over our bank. The ability of our bank to pay dividends is also
subject to its profitability, financial condition, capital expenditures and
other cash flow requirements. In addition, under the terms of our 9.60% junior
subordinated debentures due 2029, we would be precluded from paying dividends on
our common stock if we were in default under the debentures and did not take
reasonable steps to cure the default, if we exercised our right to defer
payments of interest on the debentures, or if certain related defaults occurred.
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FORWARD-LOOKING STATEMENTS
This prospectus includes "forward-looking statements." All statements
regarding our expected financial position, business and strategies are
forward-looking statements and we intend for them to be covered by the safe
harbor provisions for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995. The words "anticipates," "believes,"
"estimates," "seeks," "expects," "plans," "intends," and similar expressions, as
they relate to us or our management, are intended to identify forward-looking
statements. Although we believe that the expectations reflected in these
forward-looking statements are reasonable, and have based these expectations on
our beliefs as well as assumptions we have made, these expectations may prove to
be incorrect. Important factors that could cause actual results to differ
materially from our expectations include, without limitation, the failure of a
significant number of borrowers to repay their loans, general changes in
economic conditions and interest rates, as well as restrictions imposed on us by
regulations or regulators of the banking industry. For information about factors
that could cause our actual results to differ from the expectations stated in
the forward-looking statements, see the discussion under the captions "Risk
Factors," "Management Discussion and Analysis of Financial Condition and Results
of Operations," and "Business." We urge you to consider these factors carefully
in evaluating the forward-looking statements contained in this prospectus. The
forward-looking statements included in this prospectus are made only as of the
date of this prospectus. We do not intend, and undertake no obligation, to
update these forward-looking statements. Further information concerning us and
our business, including additional factors that could materially affect our
financial results, is included in our filings with the Securities and Exchange
Commission.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION -- JUNE 30, 2001
During the first six months of 2001, our assets increased from $512.7
million at December 31, 2000, to $617.9 million at June 30, 2001. This
represents a total increase in assets of $105.2 million, or 20.5%. The asset
growth was comprised primarily of a $77.1 million increase in net loans, an
increase of $12.1 million in federal funds sold and an increase of $7.2 million
in investment securities. The increase in assets was primarily funded by growth
in deposits of $94.5 million and an increase of $2.6 million in securities sold
under agreements to repurchase, along with the receipt of $6.8 million in net
proceeds from the sale of common stock.
Commercial loans increased by $76.5 million during the first six months of
2001, and at June 30, 2001 totaled $465.8 million, or 91.7% of the total loan
portfolio. The continued significant concentration of the loan portfolio in
commercial loans and the rapid growth of this portion of our lending business is
consistent with our strategy of focusing a substantial amount of our efforts on
"wholesale" banking. Corporate and business lending continues to be an area of
expertise of our senior management team, and our eight commercial lenders have
over 110 years of combined commercial lending experience. Of each of the loan
categories that we originate, commercial loans are most easily originated and
managed, thus reducing overhead by necessitating the attention of fewer
full-time employees. Our commercial lending business generates the greatest
amount of local deposits, and is virtually our only source of significant demand
deposits.
Residential mortgage and consumer loans also increased by $1.4 million and
$0.4 million, respectively, during the first six months of 2001. As of June 30,
2001, these loan types totaled a combined $42.3 million, or 8.3% of the total
loan portfolio. Although the residential mortgage loan and consumer loan
portfolios are expected to increase in future periods, given our wholesale
banking strategy, the commercial sector of our lending efforts and resultant
assets are expected to remain the dominant loan portfolio category.
The quality of the loan portfolio remains strong. Net loan charge-offs
during the first six months of 2001 totaled $19,713, or only 0.01% of average
total loans. Past due loans and nonaccrual loans at June 30, 2001 totaled
$176,252, or only 0.03% of period-ending total loans. We believe we have
instilled a very strong credit culture within our lending departments as it
pertains to the underwriting and administration processes, which in part is
reflected in our loan charge-off and delinquency ratios. Over 98% of the loan
portfolio consists of loans extended directly to companies and individuals doing
business and residing within our market area. The remaining portion is comprised
of commercial loans participated with certain non-affiliated commercial banks
outside of our immediate market area, which are underwritten using the same loan
underwriting criteria as though our bank was the originating bank.
Deposits increased $94.5 million during the first six months of 2001,
totaling $520.2 million at June 30, 2001. Local deposits increased $25.7
million, or 20.3%, while out-of-area deposits increased $68.8 million, or 23.0%.
As a percent of total deposits, local deposits declined slightly from 29.8% at
December 31, 2000, to 29.3% at June 30, 2001. Noninterest-bearing demand
deposits, comprising 7.4% of total deposits, increased $11.0 million during the
first six months of 2001. Savings deposits (7.8% of total deposits) increased
$4.3 million, interest-bearing checking deposits (2.8% of total deposits)
increased
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$1.8 million and money market deposit accounts (1.0% of total deposits)
increased $0.1 million during the first six months of 2001. Local certificates
of deposit, comprising 10.3% of total deposits, increased by $8.5 million during
the first six months of 2001.
Out-of-area deposits totaled $367.8 million, or 70.7% of total deposits, as
of June 30, 2001. Out-of-area deposits consist primarily of certificates of
deposit obtained from depositors located outside our market area and placed by
deposit brokers for a fee, but also include certificates of deposit obtained
from the deposit owners directly. Out-of-area deposits are utilized to support
our asset growth, and are generally a lower cost source of funds when compared
to the interest rates that would have to be offered in the local market to
generate a sufficient level of funds. During the first six months of 2001, rates
paid on new out-of-area certificates of deposit were very similar to rates paid
on new certificates of deposit issued to local customers. In addition, the
overhead costs associated with out-of-area deposits are considerably less than
the overhead costs that would be incurred to administer a similar level of local
deposits. While we anticipated the reliance on out-of-area deposits in the early
stages of our development, our longer-term funding strategy is to increase local
deposits and lower our reliance on out-of-area deposits. However, although local
deposits have and are expected to increase as new business, governmental and
consumer deposit relationships are established and as existing customers
increase the balances in their deposit accounts, the relatively high reliance on
out-of-area deposits will likely remain.
Securities sold under agreements to repurchase ("repurchase agreements")
increased by $2.6 million during the first six months of 2001. As part of our
sweep account program, collected funds from certain business noninterest-bearing
checking accounts are invested into over-night interest-bearing repurchase
agreements. Although not considered a deposit account and therefore not afforded
federal deposit insurance, the repurchase agreements have characteristics very
similar to that of business checking deposit accounts.
RESULTS OF OPERATIONS FOR THE PERIODS ENDED JUNE 30, 2001 AND 2000
Net income for the first six months of 2001 was $1.7 million ($0.58 per
basic and diluted share), which represents a 48.9% increase over net income of
$1.1 million ($0.44 per basic and diluted share) recorded during the first six
months of 2000. Basic and fully diluted earnings per share were 31.8% higher in
the first six months of 2001 over the level recorded during the comparable time
period in 2000. The improvement in net income and earnings per share is
primarily the result of an increase in net interest income, higher noninterest
income and greater employee efficiency.
Interest income during the first six months of 2001 was $21.9 million, an
increase of 30.8% over the $16.7 million earned during the first six months of
2000. The growth in interest income is primarily attributable to an increase in
earning assets. During the first six months of 2001, earning assets averaged
$539.3 million, a level significantly higher than average earning assets of
$400.7 million during the same time period in 2000. The increase in total loans
and investment securities accounted for 83.7% and 13.3% of the growth in average
earnings assets, respectively. Negatively impacting the growth in interest
income during the first six months of 2001 was the decline in yield on earning
assets. During the first six months of 2001 and 2000, earning assets had a
weighted average yield of 8.24% and 8.44% respectively. The decrease in the
weighted average yields in 2001 is primarily due to the overall decline of
market interest rates during the first six months of 2001, in part evidenced by
the 275 basis point drop in the prime rate since January 3, 2001.
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Interest expense during the first six months of 2001 was $14.7 million, an
increase of 34.8% over the $10.9 million expensed during the first six months of
2000. The growth in interest expense is primarily attributable to the growth in
assets, which necessitated an increase in funding liabilities. During the first
six months of 2001, interest-bearing liabilities averaged $512.6 million, a
level substantially higher than average interest-bearing funds of $358.9 million
during the same time period in 2000. During the first six months of 2001,
interest-bearing liabilities had a weighted average rate of 6.13%, slightly
higher than the weighted average rate of 6.10% during the first six months of
2000. The increasing interest rate environment during 2000, which peaked towards
the end of the second quarter of 2000 and remained relatively stable throughout
the remainder of 2000, resulted in a significant increased cost of funds during
the second half of 2000. The aforementioned decline in market interest rates
during 2001 has resulted in a substantial decline in the cost of funds over the
past six months that is not reflected in the six month 2001 and 2000 comparison.
A continued decline in the cost of interest-bearing liabilities is expected so
long as market interest rates remain at current levels or continue to decline
further.
Net interest income during the first six months of 2001 was $7.2 million,
an increase of 23.4% over the $5.8 million earned during the same time period in
2000. The net interest margin declined from 2.97% during the first six months of
2000 to 2.74% in the first six months of 2001. Although we experienced
significant asset growth during the first six months of 2001 when compared to
the same time period in 2000, the net interest margin declined primarily due to
the rapid decline in market interest rates that occurred during the first six
months of 2001 and our sensitivity to such declines in the short-term. The level
of loans tied to the prime rate is approximately double the level of non-
certificate of deposit funding products. As a result, and despite the fact that
most of the major interest rate indicies declined in a similar manner, each time
market interest rates declined our net interest margin was negatively impacted.
However, the negative impact of this repricing gap is short-term in nature. As
interest rates stabilize and a significant volume of local and out-of-area
certificates of deposit mature and reprice to much lower levels throughout the
remainder of 2001 and into 2002, our net interest margin is expected to improve.
See "Quantitative and Qualitative Disclosure About Market Risk".
In addition to providing interest income and secondary liquidity, our
investment portfolio plays an integral role in managing our net interest margin.
During the relatively high interest rate environment in 2000, our bank purchased
four $1.0 million heavily discounted U.S. government-sponsored agency callable
bonds. A major factor in purchasing the bonds was the expectation that the bonds
would likely be called by the issuer in a declining interest rate environment,
resulting in the remaining discount being immediately accreted into interest
income and at least partially offsetting the short-term negative impact a
declining interest rate environment would have on our net interest margin. With
interest rates declining during the first quarter of 2001, two of the bonds were
called by the issuer and the combined unaccreted discount of $71,808 was
immediately taken into interest income. Of the remaining two bonds, one was not
initially callable until June 2001, and the other bond, while immediately
callable, was not called by the issuer as interest rates had not declined to a
level where it was likely to be called by the issuer. Given that net interest
margin management was a major factor in purchasing the bonds, we decided to sell
the remaining two bonds, and an aggregate profit of $97,289 was recorded during
the first quarter of 2001. Although accounting standards require that gains on
the sales of securities be recorded as noninterest income, if the resulting
gains were allowed to be recorded as interest income, thereby paralleling
management's intent, the net interest
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margin for the first six months of 2001 would have been 2.78%, or about four
basis points higher than the 2.74% addressed earlier.
The following table sets forth certain information relating to our
consolidated average interest earning assets and interest-bearing liabilities
and reflects the average yield on assets and average cost of liabilities for the
second quarter of 2001 and 2000. Such yields and costs are derived by dividing
income or expense by the average daily balance of assets or liabilities,
respectively, for the period presented. For tax-exempt securities, interest
income and yield have been computed on a tax equivalent basis using a marginal
tax rate of 34%.
FOR THE SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------------
2001 2000
----------------------------- -----------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- ------- -------- -------- -------
(DOLLARS IN THOUSANDS)
ASSETS
Loans....................... $460,552 $19,426 8.51% $346,172 $14,995 8.69%
Investment securities....... 63,878 2,253 7.05 45,377 1,556 6.86
Federal funds sold.......... 14,736 360 4.86 9,033 272 6.02
Short term investments...... 118 2 3.82 147 3 4.56
-------- ------- ---- -------- ------- ----
Total interest-earning
assets................. 539,284 22,041 8.24 400,729 16,826 8.47
Allowance for loan losses... (6,795) (5,162)
Other assets................ 24,054 17,829
-------- --------
Total assets............. $556,543 $413,396
======== ========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing deposits... $436,367 $13,279 6.14% $317,011 $ 9,553 6.08%
Short-term borrowings....... 31,691 641 4.08 25,856 564 4.40
Long-term borrowings........ 16,076 787 9.81 16,021 794 9.81
-------- ------- ---- -------- ------- ----
Total interest-bearing
liabilities............ 484,134 14,707 6.13 358,888 10,911 6.13
Noninterest-bearing
deposits................. 28,534 22,408
Other liabilities........... 6,992 3,673
Shareholders' equity........ 36,883 28,427
-------- --------
Total liabilities and
shareholders' equity... $556,543 $413,396
======== ========
Net interest income......... $ 7,334 $ 5,915
======= =======
Net interest rate spread.... 2.11% 2.34%
==== ====
Net interest rate spread on
average assets........... 2.66% 2.87%
==== ====
Net interest margin on
earning assets........... 2.74% 2.97%
==== ====
Provisions to the allowance for loan losses during the first six months of
2001 were $1,180,000, an increase of 24.9% from the $945,000 expensed during the
same time period in 2000. The increase reflects the higher volume of loan
growth. During the first six months of 2001, net loan charge-offs totaled
$19,713 compared to net loan charge-offs of
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$37,984 during the same time period in 2000. The allowance for loan losses as a
percentage of total loans outstanding as of June 30, 2001 was 1.47%, unchanged
from the level at December 31, 2000.
In each accounting period, the allowance for loan losses is adjusted to the
amount believed necessary by management to maintain the allowance at adequate
levels. Through the loan review and credit department, management attempts to
allocate specific portions of the allowance for loan losses based on
specifically identifiable problem loans. The evaluation of the allowance for
loan losses is further based on, although not limited to, consideration of the
internally prepared Loan Loss Reserve Analysis ("Reserve Analysis"), composition
of the loan portfolio, third party analysis of the loan administration processes
and loan portfolio and general economic conditions. In addition, our bank's
status as a relatively new banking organization and the rapid loan growth
experienced since inception is taken into account.
The Reserve Analysis, used since the inception of our bank and completed
monthly, applies reserve allocation factors to outstanding loan balances to
calculate an overall allowance dollar amount. For commercial loans, which
continue to comprise a majority of total loans, reserve allocation factors are
based upon the loan ratings as determined by our comprehensive loan rating
paradigm that is administered by the loan review function. For retail loans,
reserve allocation factors are based upon the type of credit. The reserve
allocation factors are based on the experience of senior management making
similar loans in the same community over the past 15 years. The Reserve Analysis
is reviewed regularly by senior management and the Board of Directors and is
adjusted periodically based upon identifiable trends and experience.
Noninterest income, excluding net gains on sales of securities, during the
first six months of 2001 was $675,000, an increase of 38.1% over the $489,000
earned during the same time period in 2000. Service charge income on deposits
and repurchase agreements increased $68,000 (42.6%) over $159,000 earned in the
comparable time period in 2000. The strong increase primarily resulted from new
accounts opened during the last 12 months. Reflecting declining interest rates
and the resulting increase in residential mortgage loan refinancings, fees
earned on referring residential mortgage loan applicants to various third
parties increased $110,000 (159.0%) during the first six months of 2001 compared
to $69,000 earned during the first six months of 2000. Primarily reflecting the
issuance of new letters of credit, letter of credit fees were up $35,000 (29.9%)
during the first six months of 2001 when compared to $116,000 earned in the
first six months of 2000.
Noninterest expense during the first six months of 2001 was $4.3 million,
an increase of 17.8% over the $3.7 million expensed during the same time period
in 2000. The growth was due to an increase in salaries and benefits, as well as
general overhead costs. The increases in salaries and benefits primarily
resulted from the hiring of additional staff and annual pay increases. General
overhead costs have also increased reflecting the additional expenses required
to administer the significantly increased asset base.
While the dollar volume of noninterest costs have increased, as a percent
of average assets the level has substantially declined as a result of our asset
growth and the realization of operating efficiencies. During the first six
months of 2001, noninterest costs were 1.57% of average assets on an annualized
basis, a 12.8% decline from the 1.80% level during the same period in 2000.
Monitoring and controlling our noninterest costs, while at the same time
providing high quality service to our customers, is one of our priorities. Our
efficiency ratio, computed by dividing noninterest expenses by net interest
income plus noninterest
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income, was 54.6% during the first six months of 2001, which compares favorably
to the efficiency ratio of 58.5% during the second quarter and first six months
of 2000, respectively. A higher level of net revenue growth (net interest income
plus noninterest income) when compared to the growth in overhead costs has lead
to improved efficiency ratios and overall profitability.
Federal income tax expense was $727,000 during the first six months of
2001, an increase of 37.7% over the $528,000 expensed during the first six
months of 2000. The increase is due to the growth in our profitability.
LIQUIDITY -- JUNE 30, 2001
Liquidity is measured by our ability to raise funds through deposits,
borrowed funds, capital or cash generated from the repayment of loans and
investment securities. These funds are used to meet deposit withdrawals,
maintain reserve requirements, fund loans and support our operations. Liquidity
is primarily achieved through the growth of deposits (both local and
out-of-area) and liquid assets such as securities available-for-sale, matured
securities, and federal funds sold. Asset and liability management is the
process of managing our balance sheet to achieve a mix of earning assets and
liabilities that maximizes profitability, while providing adequate liquidity.
Our liquidity strategy is to fund our loan growth with deposits and
repurchase agreements and to maintain an adequate level of short- and
medium-term investments to meet typical daily loan and deposit activity.
Although deposit and repurchase agreement growth from customers located in our
market area have consistently increased, the growth has not been sufficient to
meet our substantial loan growth and provide monies for additional investing
activities. To assist in providing the additional needed funds, we have
regularly obtained certificates of deposit from customers outside of our market
area and placed by deposit brokers for a fee, as well as certificates of deposit
obtained from the deposit owners directly. As of June 30, 2001, out-of-area
deposits totaled $367.8 million, or 66.0% of combined deposits and repurchase
agreements, an increase from the $299.0 million, or 65.3% of combined deposits
and repurchase agreements, as of December 31, 2000.
Our bank has the ability to borrow money on a daily basis through
correspondent banks via established federal funds purchased lines; however, we
view these funds as only a secondary and temporary source of funds. We did not
borrow any federal funds during the first six months of 2001. Our bank's federal
funds sold position averaged $14.7 million, or 2.6% of average assets, during
the first six months of 2001. In addition, as a member of the Federal Home Loan
Bank of Indianapolis ("FHLBI"), our bank has access to the FHLBI's borrowing
programs. Based on ownership of FHLBI stock and available collateral at June 30,
2001, our bank could borrow up to $15.0 million. We have yet to use our
established borrowing line at the FHLBI.
We have also been extended a $10.0 million unsecured line of credit from a
correspondent bank. Proceeds from borrowings under the credit facility may be
used for working capital, investment in our bank or acquisition of financial
institutions. The line, which has yet to be utilized, matures on February 27,
2002.
In addition to normal loan funding and deposit flow, we must maintain
liquidity in order to meet the demands of certain unfunded loan commitments and
standby letters of credit. As of June 30, 2001, our bank had a total of $131.1
million in unfunded loan
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commitments and $38.3 million in unfunded standby letters of credit. Of the
total unfunded loan commitments, $117.2 million were commitments available as
lines of credit to be drawn at any time as customers' cash needs vary, and $13.9
million were for loan commitments expected to close and become funded within the
next three months. Management monitors fluctuations in loan balances and
commitment levels, and utilizes such data in managing our overall liquidity.
CAPITAL RESOURCES -- JUNE 30, 2001
Shareholders' equity is a noninterest-bearing source of funds that provides
support for asset growth. Shareholders' equity was $40.4 million and $31.9
million at June 30, 2001 and December 31, 2000, respectively. The increase
during the first six months of 2001 was primarily attributable to the sale of
common stock and net income. During the first quarter we sold a total of 516,600
shares of our common stock in two private placement offerings, raising $6.7
million in net proceeds. We contributed substantially all of the net proceeds to
our bank as capital. Net income equaled $1.7 million during the first six months
of 2001. In addition, shareholders' equity was also positively impacted during
the first six months of 2001 by a $0.2 million mark-to-market adjustment for
available-for-sale securities as defined in SFAS No. 115. The adjustment was due
to the decline in interest rates during the first six months of 2001.
In September 1999, we, through MBWM Capital Trust I ("the trust"), issued
1.6 million shares of trust preferred securities at $10.00 per share.
Substantially all of the net proceeds were ultimately contributed to our bank as
capital and were used to support anticipated growth in assets, fund investments
in loans and securities, and for general corporate purposes. Although not part
of shareholder's equity, subject to certain limitations the trust preferred
securities are considered a component of capital for purposes of calculating
regulatory capital ratios. At June 30, 2001, $13.3 million of the $16.0 million
issued was included as Tier 1 capital, with the remaining amount included as
Tier 2 capital. The amount includable as Tier 1 capital is expected to increase
in future periods as shareholders' equity increases from anticipated net income.
We are subject to regulatory capital requirements administered by the State
of Michigan and federal banking agencies. Failure to meet the various capital
requirements can initiate regulatory action that could have a direct material
effect on our financial condition and results of operations. Since our bank
commenced operations, both the company and our bank have been categorized as
"Well Capitalized," the highest classification contained within the banking
regulations. Our capital ratios and the capital ratios of our bank as of June
30, 2001 and December 31, 2000 are disclosed under Note 16 of the Notes to
Consolidated Financial Statements included herein.
Our and our bank's ability to pay cash and stock dividends is subject to
limitations under various laws and regulations and to prudent and sound banking
practices. We declared a 5% stock dividend on January 10, 2001, which was paid
on February 1, 2001 to record holders as of January 19, 2001. We have not paid
cash dividends on our common stock since our formation in 1997, and we currently
have no intention of doing so in the foreseeable future.
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QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK -- JUNE 30, 2001 AND
DECEMBER 31, 2000
Our primary market risk exposure is interest rate risk and, to a lesser
extent, liquidity risk. All of our transactions are denominated in U.S. dollars
with no specific foreign exchange exposure. We have only limited
agricultural-related loan assets and therefore have no significant exposure to
changes in commodity prices. Any impact that changes in foreign exchange rates
and commodity prices would have on interest rates are assumed to be
insignificant. Interest rate risk is the exposure of our financial condition to
adverse movements in interest rates. We derive income primarily from the excess
of interest collected on our interest-earning assets over the interest paid on
our interest-bearing liabilities. The rates of interest we earn on our assets
and owe on our liabilities generally are established contractually for a period
of time. Since market interest rates change over time, we are exposed to lower
profitability if we cannot adapt to interest rate changes. Accepting interest
rate risk can be an important source of profitability and shareholder value;
however, excessive levels of interest rate risk could pose a significant threat
to our earnings and capital base. Accordingly, effective risk management that
maintains interest rate risk at prudent levels is essential to our safety and
soundness.
Evaluating our exposure to changes in interest rates includes assessing
both the adequacy of the process used to control interest rate risk and the
quantitative level of exposure. Our interest rate risk management process seeks
to ensure that appropriate policies, procedures, management information systems
and internal controls are in place to maintain interest rate risk at prudent
levels with consistency and continuity. In evaluating the quantitative level of
interest rate risk we assess the existing and potential future effects of
changes in interest rates on our financial condition, including capital
adequacy, earnings, liquidity and asset quality.
We use two interest rate risk measurement techniques. The first, which is
commonly referred to as GAP analysis, measures the difference between the dollar
amounts of interest sensitive assets and liabilities that will be refinanced or
repriced during a given time period. A significant repricing gap could result in
a negative impact to the net interest margin during periods of changing market
interest rates.
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The following tables depicts our GAP position as of June 30, 2001 (dollars
in thousands):
WITHIN THREE TO ONE TO
THREE TWELVE FIVE AFTER FIVE
MONTHS MONTHS YEARS YEARS TOTAL
-------- --------- -------- ---------- --------
Assets:
Commercial loans......... $208,544 $ 5,006 $240,479 $ 11,770 $465,799
Residential real estate
loans................. 11,173 1,043 15,523 7,359 35,098
Consumer loans........... 1,541 992 4,554 127 7,214
Investment
securities(1)......... 785 1,180 24,611 41,049 67,625
Federal funds sold....... 18,400 0 0 0 18,400
Short term investments... 142 0 0 0 142
Allowance for loan
losses................ 0 0 0 (7,462) (7,462)
Other assets............. 0 0 0 31,071 31,071
-------- --------- -------- -------- --------
Total assets............... 240,585 8,221 285,167 83,914 617,887
Liabilities:
Interest-bearing
checking.............. 14,788 0 0 0 14,788
Savings.................. 40,621 0 0 0 40,621
Money market accounts.... 5,285 0 0 0 5,285
Time deposits
<$100,000............. 24,337 39,867 16,280 0 80,484
Time deposits $100,000
and over.............. 98,416 167,837 74,410 0 340,663
Short-term borrowings.... 34,788 0 0 0 34,788
Long-term borrowings..... 111 0 0 16,000 16,111
Noninterest-bearing
checking.............. 0 0 0 38,381 38,381
Other liabilities........ 0 0 0 6,319 6,319
-------- --------- -------- -------- --------
Total liabilities.......... 218,346 207,704 90,690 60,700 577,440
Shareholders' equity....... 40,447 40,447
-------- --------- -------- -------- --------
Total sources of funds..... 218,346 207,704 90,690 101,147 617,887
-------- --------- -------- -------- --------
Net asset (liability)
GAP...................... $ 22,239 $(199,483) $194,477 $(17,233)
======== ========= ======== ========
Cumulative GAP............. $ 22,239 $(177,244) $ 17,233
======== ========= ========
Percent of cumulative GAP
to total assets.......... 3.6% (28.7)% 2.8%
======== ========= ========
- -------------------------
(1) Mortgage-backed securities are categorized by expected final maturities
based upon prepayment trends as of June 30, 2001.
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The following tables depicts our GAP position as of December 31, 2000
(dollars in thousands):
WITHIN THREE TO ONE TO AFTER
THREE TWELVE FIVE FIVE
MONTHS MONTHS YEARS YEARS TOTAL
-------- --------- -------- ------- -----
Assets:
Commercial loans.......... $139,454 $ 8,917 $228,412 $12,521 $389,304
Residential real estate
loans.................. 9,186 1,913 16,181 6,429 33,709
Consumer loans............ 1,559 917 4,107 208 6,791
Investment
securities(1).......... 785 604 14,497 44,571 60,457
Federal funds sold........ 6,300 0 0 0 6,300
Short term investments.... 109 0 0 0 109
Allowance for loan
losses................. 0 0 0 (6,302) (6,302)
Other assets.............. 0 0 0 22,378 22,378
-------- --------- -------- ------- --------
Total assets................ 157,393 12,351 263,197 79,805 512,746
Liabilities:
Interest-bearing
checking............... 12,968 0 0 0 12,968
Savings................... 36,331 0 0 0 36,331
Money market accounts..... 5,196 0 0 0 5,196
Time deposits under
$100,000............... 17,923 35,245 8,257 0 61,425
Time deposits $100,000 and
over................... 64,939 172,967 44,546 0 282,452
Short term borrowings..... 32,151 0 0 0 32,151
Long term borrowings...... 57 0 0 16,000 16,057
Noninterest-bearing
checking............... 0 0 0 27,368 27,368
Other liabilities......... 0 0 0 6,944 6,944
-------- --------- -------- ------- --------
Total liabilities........... 169,565 208,212 52,803 50,312 480,892
Shareholders' equity........ 0 0 0 31,854 31,854
-------- --------- -------- ------- --------
Total sources of funds...... 169,565 208,212 52,803 82,166 512,746
-------- --------- -------- ------- --------
Net asset (liability) GAP... $(12,172) $(195,861) $210,394 $(2,361)
======== ========= ======== =======
Cumulative GAP.............. $(12,172) $(208,033) $ 2,361
======== ========= ========
Percent of cumulative GAP to
total assets.............. (2.4)% (40.6)% 0.5%
======== ========= ========
- -------------------------
(1) Mortgage-backed securities are categorized by expected maturities based upon
prepayment trends as of December 31, 2000.
The second interest rate risk measurement used is commonly referred to as
net interest income simulation analysis. We believe that this methodology
provides a more accurate measurement of interest rate risk than the GAP
analysis, and therefore, serves as the primary interest rate risk measurement
technique we use. The simulation model assesses the direction and magnitude of
variations in net interest income resulting from potential changes in market
interest rates. Key assumptions in the model include prepayment speeds on
various loan and investment assets; cash flows and maturities of
interest-sensitive assets and liabilities; and changes in market conditions
impacting loan and deposit volume and pricing. These assumptions are inherently
uncertain, subject to
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fluctuation and revision in a dynamic environment; therefore, the model cannot
precisely estimate net interest income or exactly predict the impact of higher
or lower interest rates on net interest income. Actual results will differ from
simulated results due to timing, magnitude, and frequency of interest rate
changes and changes in market conditions and our strategies, among other
factors.
We regularly conduct multiple simulations, whereby it was assumed that a
simultaneous, instant and sustained change in market interest rates occurred.
The following table reflects the suggested impact on net interest income over
the next twelve months, which is well within the policy parameters we
established to manage and monitor interest rate risk.
The following table depicts the results of the net interest income
simulation analysis as of June 30, 2001:
DOLLAR CHANGE IN PERCENT CHANGE IN
INTEREST RATE SCENARIO NET INTEREST INCOME NET INTEREST INCOME
---------------------- ------------------- -------------------
Interest rates down 200 basis points........ $3,270,000 19.9%
Interest rates down 100 basis points........ 3,158,000 19.3
No change in interest rates................. 3,040,000 18.5
Interest rates up 100 basis points.......... 3,113,000 19.0
Interest rates up 200 basis points.......... 3,184,000 19.4
The increase in net interest income under all interest rate scenarios
reflects the expected repricing of local and out-of-area certificates of deposit
during the next twelve months. Unlike our floating rate loans that declined
throughout the first six months of 2001 as the prime rate declined, our
certificates of deposit have fixed interest rates and only reprice at maturity.
Throughout the remainder of 2001 and into 2002 we have a large volume of
certificates of deposit that will mature and will be refinanced at lower
interest rates.
The following table depicts the results of the net interest income
simulation analysis as of December 31, 2000:
DOLLAR CHANGE IN PERCENT CHANGE IN
INTEREST RATE SCENARIO NET INTEREST INCOME NET INTEREST INCOME
---------------------- ------------------- -------------------
Interest rates down 200 basis points........ $687,000 4.8%
Interest rates down 100 basis points........ 451,000 3.2
No change in interest rates................. 213,000 1.5
Interest rates up 100 basis points.......... 137,000 1.0
Interest rates up 200 basis points.......... 64,000 0.5
The following table depicts the results of the net interest income
simulation analysis as of December 31, 1999:
DOLLAR CHANGE IN PERCENT CHANGE IN
INTEREST RATE SCENARIO NET INTEREST INCOME NET INTEREST INCOME
---------------------- ------------------- -------------------
Interest rates down 200 basis points........ $ 242,000 2.4%
Interest rates down 100 basis points........ 31,000 0.3
No change in interest rates................. (177,000) (1.8)
Interest rates up 100 basis points.......... (255,000) (2.6)
Interest rates up 200 basis points.......... (332,000) (3.4)
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In addition to changes in interest rates, the level of future net interest
income is also dependent on a number of other variables, including: the growth,
composition and absolute levels of loans, deposits, and other earning assets and
interest-bearing liabilities; economic and competitive conditions; potential
changes in lending, investing and deposit gathering strategies; client
preferences; and other factors.
FINANCIAL CONDITION -- DECEMBER 31, 2000
We continued to experience significant asset growth during 2000. Assets
increased from $368.0 million on December 31, 1999 to $512.7 million on December
31, 2000. This represents an increase in total assets of $144.7 million, or 39%.
The increase in total assets was primarily comprised of a $120.1 million
increase in net loans, an $18.5 million increase in investment securities and a
$4.4 million increase in cash and cash equivalents. The increase in assets was
primarily funded by a $130.9 million increase in deposits, a $5.5 million
increase in repurchase agreements, and an increase of $2.8 million in retained
income.
Average earning assets equaled over 96% of average total assets during
2000. Although we experienced significant asset growth during 2000, the asset
structure remained relatively constant. Our loan portfolio continued to comprise
a majority of earning assets, followed by investments securities, federal funds
sold, and short-term investments.
Our loan portfolio, which equaled 86% of average earnings assets during
2000, is primarily comprised of commercial loans. Constituting 91% of average
loans and growing by $108.2 million during 2000, our commercial loan portfolio
represents loans to business interests generally located within our market area.
At December 31, 2000, approximately 61% of our commercial loan portfolio was
primarily secured by real estate properties, with the remaining generally
secured by other business assets such as accounts receivable, inventory, and
equipment. There were no significant industry concentrations within our
commercial loan portfolio. The concentration and rapid growth in commercial
loans was in keeping with our strategy of focusing a substantial amount of our
efforts on commercial banking. Residential mortgage and consumer lending, while
averaging only 9% of average loans during 2000, also experienced excellent
growth; however, our strategy for growth and profitability is expected to result
in the commercial sector of the lending efforts and resultant assets continuing
to be the dominant loan portfolio category.
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The following table presents the maturity of total loans outstanding, other
than residential mortgages and personal loans, as of December 31, 2000,
according to scheduled repayments of principal on fixed rate loans and repricing
frequency on variable rate loans.
0-1 1-5 AFTER 5
YEAR YEARS YEARS TOTAL
------------ ------------ ----------- ------------
Construction and land
development -- fixed
rate...................... $ 4,488,620 $ 10,305,471 $ 1,586,551 $ 16,380,642
Construction and land
development -- variable
rate...................... 22,434,794 0 0 22,434,794
Real estate -- secured by
nonfarm nonresidential
properties -- fixed
rate...................... 3,704,514 151,771,603 4,596,848 160,072,965
Real estate -- secured by
nonfarm nonresidential
properties -- variable
rate...................... 39,072,144 0 0 39,072,144
Commercial -- fixed rate.... 2,393,673 66,243,029 6,337,305 74,974,007
Commercial -- variable
rate...................... 76,278,024 91,997 0 76,370,021
------------ ------------ ----------- ------------
$148,371,769 $228,412,100 $12,520,704 $389,304,573
============ ============ =========== ============
Our credit policies establish guidelines to manage credit risk and asset
quality. These guidelines include loan review and early identification of
problem loans to provide effective loan portfolio administration. The credit
policies and procedures are meant to minimize the risk and uncertainties
inherent in lending. In following these policies and procedures, we must rely on
estimates, appraisals and evaluations of loans and the possibility that changes
in these could occur quickly because of changing economic conditions. Identified
problem loans, which exhibit characteristics (financial or otherwise) that could
cause the loans to become nonperforming or require restructuring in the future,
are included on the internal "Watch List." Senior management reviews this list
regularly and adjusts for changing conditions.
Reflective of our strong credit culture, past due loans and net loan
charge-offs remained very low and well below banking industry averages during
2000. As of December 31, 2000, past due loans and nonaccrual loans totaled
$271,000, or only 0.06% of total loans. Of this amount, $176,000 was fully
guaranteed by the U.S. Small Business Administration. Net loan charge-offs
during 2000 totaled $173,000, or only 0.05% of average total loans. During 1999
net loan charge-offs equaled 0.04% of average total loans.
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The following table illustrates the breakdown of the allowance balance to
loan type (dollars in thousands).
2000 1999
--------------------------- ---------------------------
PERCENT OF LOANS PERCENT OF LOANS
BALANCE AT END OF IN EACH CATEGORY IN EACH CATEGORY
PERIOD APPLICABLE TO AMOUNT TO TOTAL LOANS AMOUNT TO TOTAL LOANS
-------------------- ------- ---------------- ------- ----------------
Commercial, financial and
agricultural.................. $5,839 90.6% $4,306 91.3%
Residential real estate......... 369 7.8 239 7.3
Installment loans to
individuals................... 94 1.6 75 1.4
Unallocated..................... 0 N/A 0 N/A
------ ----- ------ -----
$6,302 100.0% $4,620 100.0%
====== ===== ====== =====
1998 1997
--------------------------- ---------------------------
PERCENT OF LOANS PERCENT OF LOANS
BALANCE AT END OF IN EACH CATEGORY IN EACH CATEGORY
PERIOD APPLICABLE TO AMOUNT TO TOTAL LOANS AMOUNT TO TOTAL LOANS
-------------------- ------- ---------------- ------- ----------------
Commercial, financial and
agricultural.................. $2,612 84.3% $ 193 98.6%
Residential real estate......... 114 14.6 0 1.3
Installment loans to
individuals................... 39 1.1 0 0.1
Unallocated..................... 0 N/A 0 N/A
------ ----- ------ -----
$2,765 100.0% $ 193 100.0%
====== ===== ====== =====
The primary risk elements with respect to commercial loans are the
financial condition of the borrower, the sufficiency of collateral, and lack of
timely payment. We have a policy of requesting and reviewing periodic financial
statements from our commercial loan customers, and periodically review the
existence of collateral and its value. The primary risk element considered by us
with respect to each installment and residential real estate loan is lack of
timely payment. We have a reporting system that monitors past due loans and we
have adopted policies to pursue our creditor's rights in order to preserve our
position.
Although we believe that the allowance is adequate to cover incurred
losses, there can be no assurance that we will not sustain losses in any given
period that could be substantial in relation to, or greater than, the size of
the allowance.
The investment securities portfolio also experienced significant growth
during 2000, increasing from $42.0 million on December 31, 1999 to $60.5 million
at December 31, 2000. We maintain the portfolio at levels to provide adequate
pledging for the repurchase agreement program and secondary liquidity for our
daily operations. In addition, the portfolio serves a primary interest rate risk
management function. During 2000, the portfolio equaled 12% of average earning
assets. At December 31, 2000, the portfolio was comprised of high credit quality
U.S. Government Agency issued and guaranteed mortgage-backed securities (57%),
municipal general obligation and revenue bonds (26%), U.S. Government Agency
issued bonds (16%) and Federal Home Loan Bank stock (1%).
All securities with the exception of tax-exempt municipal bonds have been
designated as "available-for-sale" as defined in Financial Accounting Standards
Board Standard
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No. 115, Accounting for Certain Investments in Debt and Equity Securities (SFAS
No. 115). Securities designated as available-for-sale are stated at fair value,
with the unrealized gains and losses, net of income tax, reported as a separate
component of shareholders' equity. The fair value of securities designated as
available for sale at December 31, 2000 and 1999 was $45.9 million and $34.9
million, respectively. The net unrealized gain/(loss) recorded at December 31,
2000 and 1999, was $290,000 and $(802,000), respectively. All tax-exempt
municipal bonds have been designated as "held to maturity" as defined in SFAS
No. 115, and are stated at amortized cost. As of December 31, 2000 and 1999,
held to maturity securities had an amortized cost of $14.5 million and $7.1
million and a fair value of $14.9 million and $7.0 million, respectively.
Federal funds sold, consisting of excess funds sold overnight to
correspondent banks, are used to manage daily liquidity needs and interest rate
sensitivity. During 2000, the average balance of these funds equaled 2% of
average earning assets.
Our major source of funds is from deposits. Total deposits increased from
$294.8 million at December 31, 1999, to $425.7 million on December 31, 2000.
Included within these numbers is the excellent success we achieved in generating
deposit growth from customers located within the market area during 2000. Local
deposits increased from $103.3 million at December 31, 1999, to $126.7 million
on December 31, 2000, an increase of over 22%. In addition, our repurchase
agreement program, which contains the characteristics of an interest-bearing
checking account, increased by $5.5 million, or 21%, during the same time
period.
During 2000 we experienced excellent growth in our check-writing deposit
accounts, which include noninterest-bearing demand accounts, interest-bearing
checking accounts and money market deposit accounts. In aggregate these deposit
types grew by 26%. Leading the growth were noninterest-bearing demand accounts.
Comprised primarily of business loan customers, noninterest-bearing demand
accounts grew $7.9 million, or 40%, and equaled 5% of average funding sources
during 2000. Interest-bearing checking accounts increased $1.9 million, or 18%,
and equaled 3% of average funding sources during 2000. Money market deposit
accounts decreased $0.4 million, or 7%, and equaled 1% of average funding
sources during 2000, respectively. Business loan customers also comprise the
majority of interest-bearing checking and money market deposit types, although
to a lower extent than noninterest-bearing checking accounts. Pursuant to
banking regulations, incorporated businesses may not own interest-bearing
checking accounts and transactions from money market accounts are limited.
Savings account balances recorded a decline of $3.4 million, or 9%, during
2000, and equaled 8% of average funding sources during 2000. The decline was due
primarily from several large customers withdrawing funds for business purposes,
not from account closings. Business loan customers also comprise the majority of
savings account holders, although to a lower extent than checking-writing
accounts.
Certificates of deposit purchased by customers located within the market
area increased significantly during 2000, growing from $27.4 million at December
31, 1999, to $44.8 million on December 31, 2000, a growth rate of 63%. These
deposits accounted for 9% of average funding sources during 2000. Leading the
growth were certificates of deposit issued to local municipalities, primarily
counties, cities and townships, increasing from $7.0 million at December 31,
1999, to $18.6 million on December 31, 2000. The increase is due primarily from
us qualifying for additional funds from existing customers through a
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combination of asset growth and profitability as measured by the municipalities'
investment policy guidelines.
During 2000 certificates of deposit obtained from customers located outside
of the market area increased by $107.5 million, and represented 56% of average
funding sources during 2000. At December 31, 2000, this deposit type totaled
$299.0 million. These certificates of deposit were primarily placed by deposit
brokers for a fee, but also include certificates of deposit obtained from the
deposit owners directly. During most of 2000 rates paid on new out-of-area
certificates of deposit were very similar to rates paid on new certificates of
deposit issued to local customers.
Repurchase agreements increased $5.5 million and equaled 7% of average
funding sources during 2000. Part of our sweep account program, collected funds
from certain business noninterest-bearing checking accounts, is invested into
overnight interest-bearing repurchase agreements. The sweep account program is
designed for businesses that maintain relatively large checking account
balances.
Shareholders' equity increased $3.9 million and equaled 7% of average
funding sources during 2000. The increase is attributable to net income from
operations, which totaled $2.8 million, and a $1.1 million mark-to-market
adjustment for available for sale securities as defined in SFAS No. 115. This
adjustment was due solely to the changes in the interest rate environment during
2000.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
We recorded strong earnings performance during 2000, only our third full
year of operations. Net income was $2.8 million, or $1.08 per basic share and
$1.07 per diluted share. This earnings performance compares very favorably to
net income of $2.1 million, or $0.81 per basic share and $0.80 per diluted
share, recorded in 1999. The 1999 net income figure includes a one-time charge
of $42,210 ($0.02 per share), reflecting a change in accounting for organization
costs. The earnings improvement during 2000 over that of 1999 is primarily
attributable to increased net interest income and improved operating
efficiencies resulting from asset growth, strong credit culture, and controlled
overhead expenses, and was achieved despite a significant increase in federal
income tax expense. As in 1999, significant loan growth necessitated large
provisions to the allowance during 2000, substantially impacting our earnings
performance.
The following table shows some of our key performance and equity ratios for
the years ended December 31, 2000 and 1999.
2000 1999 1998
---- ---- ----
Return on average total assets......................... 0.6% 0.7% (0.9)%
Return on average equity............................... 9.5 7.7 (6.4)
Dividend payout ratio.................................. N/A N/A N/A
Average equity to average assets....................... 6.6 9.2 13.4
Net interest income, the difference between revenue generated from our
earning assets and the interest cost of funding our assets, is our primary
source of earnings. Interest income (adjusted for tax-exempt income) and
interest expense totaled $37.1 million and $24.6 million during 2000,
respectively, providing for net interest income of $12.5 million. This
performance compares very favorably to that of 1999 when interest income and
interest expense were $22.8 million and $13.3 million, respectively, providing
for net
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interest income of $9.5 million. The level of net interest income is primarily a
function of asset size, as the weighted average interest rate received on our
earning assets is greater than the weighted average interest cost of our funding
sources; however, factors such as types of assets and liabilities, interest rate
risk, liquidity, and customer behavior also impact net interest income as well
as our net interest margin. Our net interest margin declined from 3.30% in 1999
to 2.90% in 2000, primarily resulting from the full-year's impact of the
September 1999 issuance of trust preferred securities, increased reliance on
out-of-area certificates of deposit and lower level of shareholders' equity as a
percent of average assets.
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The following table depicts the average balance, interest earned and paid,
and weighted average rate of our assets, liabilities and shareholders' equity
during 2000, 1999 and 1998 (dollars in thousands). The table also depicts the
dollar amount of change in interest income and interest expense of
interest-earning assets and interest-bearing liabilities, segregated between
change due to volume and change due to rate. For tax-exempt securities interest
income and yield have been computed on a tax equivalent basis using a marginal
tax rate of 34%.
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------
2000 1999 1998
----------------------------- ----------------------------- -----------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- ------- -------- -------- ------- -------- -------- -------
Taxable securities.... $ 38,788 $ 2,662 6.86% $ 30,124 $ 1,869 6.20% $ 15,375 $ 881 5.73%
Tax-exempt
securities.......... 10,972 782 7.12 1,251 84 6.74 0 0 0.00
-------- ------- -------- ------- -------- -------
Total securities.... 49,760 3,444 6.92 31,375 1,953 6.22 15,375 881 5.73
Loans................. 372,428 33,057 8.88 246,921 20,410 8.27 105,075 9,008 8.57
Short-term
investments......... 115 6 4.74 551 26 4.68 413 23 5.68
Federal funds sold.... 8,986 567 6.31 8,099 406 5.01 4,821 256 5.32
-------- ------- -------- ------- -------- -------
Total earning
assets............ 431,289 37,074 8.60 286,946 22,795 7.94 125,684 10,168 8.09
Allowance for loan
losses.............. (5,527) (3,681) (1,590)
Cash and due from
banks............... 8,926 7,096 4,229
Other non-earning
assets.............. 10,044 6,099 2,540
-------- -------- --------
Total assets........ $444,732 $296,460 $130,863
======== ======== ========
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------
2000 1999 1998
----------------------------- ----------------------------- -----------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- ------- -------- -------- ------- -------- -------- -------
Interest-bearing demand
deposits............. $ 11,207 $ 501 4.47% $ 8,575 $ 351 4.09% $ 4,025 $ 171 4.24%
Savings deposits....... 36,040 1,875 5.20 38,886 1,871 4.81 17,494 904 5.17
Money market
accounts............. 5,405 251 4.64 4,411 189 4.29 1,170 58 4.98
Time deposits.......... 288,791 18,992 6.58 173,158 9,629 5.56 68,243 4,008 5.87
-------- ------- -------- ------- -------- ------
Total
interest-bearing
deposits........... 341,443 21,619 6.33 225,030 12,040 5.35 90,932 5,141 5.65
Short-term
borrowings........... 29,331 1,369 4.67 20,229 835 4.13 10,376 488 4.71
Long-term borrowings... 16,033 1,572 9.80 4,654 455 9.78 0 0 0.00
-------- ------- -------- ------- -------- ------
Total
interest-bearing
liabilities........ 386,807 24,560 6.35 249,913 13,330 5.33 101,308 5,629 5.56
------- ------- ------
Demand deposits........ 23,568 17,812 10,782
Other liabilities...... 4,893 1,447 343
-------- -------- --------
Total liabilities.... 415,268 269,172 112,433
Average equity......... 29,464 27,288 18,430
-------- -------- --------
Total liabilities and
equity............. $444,732 $296,460 $130,863
======== ======== ========
Net interest income.... $12,514 $ 9,465 $4,539
======= ======= ======
Rate spread............ 2.25 2.61 2.53
Net interest margin.... 2.90 3.30 3.61
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FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------
2000 OVER 1999 1999 OVER 1998
-------------------------------------- -------------------------------------
TOTAL VOLUME RATE TOTAL VOLUME RATE
----------- ----------- ---------- ----------- ----------- ---------
Increase (decrease) in
interest income
Taxable securities...... $ 793,736 $ 579,224 $ 214,512 $ 988,140 $ 909,383 $ 78,757
Tax exempt securities... 697,304 692,256 5,048 84,286 84,286 0
Loans................... 12,646,547 11,042,857 1,603,690 11,402,485 11,736,016 (333,531)
Short term
investments........... (20,358) (20,681) 323 2,336 6,926 (4,590)
Federal funds sold...... 161,720 47,814 113,906 149,236 165,035 (15,799)
----------- ----------- ---------- ----------- ----------- ---------
Net change in tax-
equivalent income... 14,278,949 12,341,470 1,937,479 12,626,483 12,901,646 (275,163)
Increase (decrease) in
interest expense
Interest-bearing demand
deposits.............. 150,459 115,433 35,026 180,447 186,460 (6,013)
Savings deposits........ 3,864 (142,183) 146,047 966,973 1,033,269 (66,296)
Money market accounts... 61,803 45,219 16,584 130,733 139,968 (9,235)
Time deposits........... 9,363,466 7,352,358 2,011,108 5,620,966 5,845,057 (224,091)
Short term borrowings... 533,604 413,787 119,817 346,867 413,370 (66,503)
Long term borrowings.... 1,116,660 1,115,539 1,121 455,216 455,216 0
----------- ----------- ---------- ----------- ----------- ---------
Net change in interest
expense............. 11,229,856 8,900,153 2,329,703 7,701,202 8,073,340 (372,138)
----------- ----------- ---------- ----------- ----------- ---------
Net change in tax-
equivalent net
interest
income........... $ 3,049,093 $ 3,441,317 $ (392,224) $ 4,925,281 $ 4,828,306 $ 96,975
=========== =========== ========== =========== =========== =========
Interest income is primarily generated from our loan portfolio, and to a
lesser degree from investment securities, federal funds sold and short term
investments. Interest income increased $14.3 million during 2000 from that
earned in 1999, totaling $37.1 million in 2000 compared to $22.8 million in the
previous year. Approximately 86% of the increase is due to the growth in earning
assets, with the remaining amount due to the increased interest rate environment
during 2000. The yield on average earning assets increased from the 7.94%
recorded in 1999 to 8.60% in 2000.
The growth in interest income is primarily attributable to an increase in
our earning assets. During 2000, earning assets averaged $431.3 million, a level
substantially higher than our average earning assets of $286.9 million during
1999. Growth in average total loans, totaling $125.5 million, comprised 87% of
the increase in average earnings assets. Interest income generated from our loan
portfolio increased $12.6 million during 2000 over the level earned in 1999,
comprised of an increase of $11.0 million due to growth in our loan portfolio
and an increase of $1.6 million due to an increase in the yield earned on our
loan portfolio. The improved loan portfolio yield is primarily due to increased
market interest rates during 2000.
Growth in our investment securities portfolio and a slightly larger federal
funds sold position also added to the increase in interest income during 2000
over that of 1999. Average investment securities increased by $18.4 million in
2000, increasing from $31.4 million in 1999 to $49.8 million in 2000. This
growth equated to an increase in interest income of $1.3 million. A higher
investment securities portfolio yield during 2000 also increased interest income
by $0.2 million. Average federal funds sold increased about $0.9 million in 2000
that, when combined with an increase in yield, added $0.2 million to
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interest income. The improved yield on investment securities and federal funds
sold is the result of increased market rates during 2000.
Interest expense is primarily generated from our interest-bearing deposits,
and to a lesser degree our repurchase agreements and our trust preferred
securities. Interest expense increased $11.2 million during 2000 from that paid
in 1999, totaling $24.5 million in 2000 compared to $13.3 million in the
previous year. The growth in interest expense is primarily attributable to an
increase in our interest-bearing liabilities and increased market interest rates
during 2000. Interest-bearing liabilities averaged $386.8 million during 2000, a
level substantially higher than the average interest-bearing liabilities of
$249.9 million during 1999. This growth resulted in increased interest expense
of $8.9 million. Increased interest expense of $2.3 million was recorded during
2000 due to higher market interest rates on all interest-bearing liability
categories except trust preferred securities that have a fixed interest rate.
The cost of our average interest-bearing liabilities increased from the 5.33%
recorded in 1999 to 6.35% in 2000.
Growth in our average certificates of deposits, totaling $115.6 million,
comprised 84% of the increase in our average interest-bearing liabilities
between 2000 and 1999. The certificate of deposit growth during 2000 equated to
an increase in interest expense of $7.4 million. In addition, interest expense
of $2.0 million was recorded due to the increase in the average rate paid.
Growth in our repurchase agreements also added to the increased interest expense
during 2000 over that of 1999, as average repurchase agreements grew from $20.2
million in 1999 to $29.3 million in 2000. The growth equated to an increase in
interest expense of $0.4 million, with an additional $0.1 million in interest
expense recorded due to the increase in the average rate paid. Higher interest
rates paid on our interest-bearing checking accounts, savings deposits and money
market accounts added, in aggregate, $0.2 million in interest expense during
2000, while the change in volume added less than $0.1 million in interest
expense. The September 1999 issuance of $16.0 million trust preferred securities
had a sizeable impact on interest expense during 2000, adding $1.1 million in
interest expense over that recorded during 1999.
Reflecting continued significant loan growth the provision for loan losses
totaled approximately $1.9 million during 2000, compared to the $2.0 million
expensed during 1999. The allowance as a percentage of total loans outstanding
as of December 31, 2000 was 1.47%, slightly lower than the 1.50% at year-end
1999. Net loan charge-offs during 2000 approximated $173,000, or only 0.05% of
average total loans. Loan charge-offs during 1999 totaled $106,000, or 0.04% of
average total loans. We maintain the allowance at a level our management feels
is adequate to absorb losses contained within the loan portfolio.
Other income totaled $1.2 million in 2000, a significant increase over the
$0.8 million earned in 1999. Deposit and repurchase agreement service charges
totaled $346,000 in 2000, an increase of $144,000, or 71%, from the amount
earned in 1999. The increase is primarily due to the growth in the number of
deposit accounts. Reflecting additional letter of credit issuances, letter of
credit commitment fees increased to $391,000 in 2000, an increase of $123,000,
or 46%, from the fees earned in 1999. Credit card and debit card interchange
income, reflecting increased issuance and usage, increased $46,000 during 2000,
totaling $144,000 for the year. Fees earned on referring residential mortgage
loan applicants to various third parties, reflecting a decline in volume due to
the increased rate environment, totaled $175,000 in 2000, compared to the
$208,000 earned in 1999.
To reduce the negative impact of rising interest rates on net interest
income, during the second quarter of 2000 we entered into a $50 million two-year
interest rate swap
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agreement with a correspondent bank. Due to market expectations and the
resulting impact on the value of the interest rate swap agreement, we terminated
the interest rate swap agreement to lock-in the earned benefit shortly
thereafter. A termination fee of $275,000 was received from the correspondent
bank. At the same time we elected to sell $7.0 million in relatively
low-yielding U.S. government-sponsored agency callable bonds and reinvest the
monies in higher-yielding U.S. government-sponsored mortgage-backed securities.
The loss on the sale of the bonds totaled $275,000; however, the consummation of
this transaction will generate a higher level of interest income than would have
otherwise been earned over at least the next three years on a present value
basis, while at the same time improving our interest rate risk position.
Noninterest expense during 2000 totaled $7.5 million, a significant
increase over the $5.9 million expensed in 1999. An increase in all major
overhead cost categories, including salaries and benefits, occupancy, and
furniture and equipment, was recorded. The increases primarily result from the
hiring of additional staff and the construction of a new combined branch and
operations center in mid-1999. All other noninterest costs also increased,
reflecting additional expenses required to administer our significantly
increased loan and deposit base.
Monitoring and controlling overhead expenses, while at the same time
providing high quality service to customers, is of utmost importance to us.
While the dollar volume of noninterest costs have increased, as a percent of
average assets the level has substantially declined as a result of our growth
and realized operating efficiencies. During 2000, noninterest costs were 1.69%
of average assets, a significant decline from the 1.99% level in 1999. The
efficiency ratio, a banking industry standardized calculation that attempts to
reflect the utilization of overhead costs, also declined during 2000. Computed
by dividing noninterest expenses by net interest income plus noninterest income,
the efficiency ratio was 55.8% in 2000. This level compares very favorably to a
very respectable 57.3% recorded in 1999, and reflects the improved efficiencies
resulting from increased asset growth and controlled costs. In addition, our
lending philosophy of concentrating on commercial lending results in higher
average loan balances compared to residential mortgage or consumer loans, which
provides for a greater volume of loans with fewer people, thereby improving our
efficiency. This point is demonstrated by our total assets per employee ratio,
which as of December 31, 2000 was a relatively high $7.9 million.
Federal income tax expense was $1.3 million in 2000, or 32% of pre-tax net
operating income, compared to $0.3 million, or 12% of pre-tax net operating
income, in 1999. During 1999, we used tax-loss carryforwards generated in 1997
and 1998 to reduce federal income tax expense. These tax-loss carryforwards were
fully utilized over the course of 1999; therefore, we had to expense the full
statutory tax rate in 2000.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
We recorded a net operating profit during 1999, only our second full year
of operations. Net operating income was $2.1 million, or $0.85 per basic share
($0.84 diluted). This earnings performance compares very favorably to our net
operating loss of $1.1 million, or $0.58 per basic and diluted share, recorded
in 1998. The 1999 net operating income includes a one-time charge of $42,210
($0.02 per share), reflecting a change in accounting for organization costs. In
accordance with previous accounting guidelines, these costs were being amortized
over a five-year period; however, as required by AICPA Statement of Position
98-5, the unamortized balance was written off effective
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39
January 1, 1999, and is reflected in the Consolidated Financial Statements as a
change in accounting principle. The earnings improvement during 1999 over that
of 1998 is primarily attributable to increased net interest income and improved
operating efficiencies resulting from asset growth, strong credit culture, and
controlled overhead expenses. As in 1998, significant loan growth necessitated
large provisions to the allowance during 1999, substantially impacting our
earnings performance.
Federal income tax expense for 1999 totaled $292,000, or 12% of pre-tax net
operating income. While we are subject to the statutory federal income tax rate
of 34%, use of tax loss carryforwards generated during 1997 and 1998 enabled us
to reduce our federal income tax expense during 1999. The entire tax loss
carryforward was utilized during 1999; therefore, our federal income tax expense
will be at the statutory tax rate in future reporting periods.
Net interest income, the difference between revenue generated from our
earning assets and the interest cost of funding those assets, is our primary
source of earnings. Interest income and interest expense totaled $22.7 million
and $13.3 million during 1999, respectively, providing for net interest income
of $9.4 million. This performance compares very favorably to that of 1998 when
interest income and interest expense were $10.1 million and $5.6 million,
respectively, providing for net interest income of $4.5 million. The level of
net interest income is primarily a function of our asset size, as the weighted
average interest rate received on our earning assets is greater than the
weighted average interest cost of our funding sources; however, factors such as
types of assets and liabilities, interest rate risk, liquidity, and customer
behavior also impact our net interest income as well as our net interest margin.
Our net interest margin declined from 3.61% in 1998 to 3.30% in 1999. Although
the weighted average cost of our interest-bearing liabilities declined at a
faster rate than the decline of our yield on interest-earning assets during
1999, our net interest margin declined primarily due to a lower level of
interest-free demand deposits and shareholders' equity as a percent of average
earning assets, as well as the issuance of trust preferred securities.
Interest income is primarily generated from our loan portfolio, and to a
lesser degree from investment securities, Federal funds sold and short term
investments. Interest income increased $12.6 million during 1999 from that
earned in 1998, totaling $22.8 million in 1999 compared to $10.2 million in the
previous year. The yield on our average earning assets declined from the 8.09%
recorded in 1998 to 7.94% in 1999.
The growth in interest income is primarily attributable to an increase in
our earning assets. During 1999 our earning assets averaged $286.9 million, a
level substantially higher than the average our earning assets of $125.7 million
during 1998. Growth in average total loans, totaling $141.8 million, comprised
88% of the increase in average earnings assets between 1999 and 1998. Our loan
growth during 1999 equated to an increase in interest income of $11.4 million,
although the increase in interest income was partially offset by a decline in
the loan portfolio yield from 8.57% in 1998 to 8.27% in 1999, or $0.3 million.
The decline in our loan portfolio yield is primarily due to the overall decline
of market interest rates during the latter part of 1998 and early part of 1999.
Growth in our investment securities portfolio and a larger federal funds
sold position also added to the increase in interest income during 1999 over
that of 1998. Average investment securities increased by $16.0 million in 1999,
increasing from $15.4 million in 1998 to $31.4 million in 1999. This growth
equated to an increase in interest income of $1.1 million. A higher investment
securities portfolio yield during 1999 also increased
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interest income. Average federal funds sold increased from $4.8 million in 1998
to $8.1 million in 1999 that, after accounting for a decline in the yield, added
approximately $150,000 to interest income.
Interest expense is primarily generated from our interest-bearing deposits,
and to a lesser degree our repurchase agreements and trust preferred securities.
Interest expense increased $7.7 million during 1999 from that paid in 1998,
totaling $13.3 million in 1999 compared to $5.6 million in the previous year.
The cost of our average interest-bearing liabilities declined from the 5.56%
recorded in 1998 to 5.33% in 1999.
The growth in interest expense is primarily attributable to an increase in
our interest-bearing liabilities. During 1999 interest-bearing liabilities
averaged $249.9 million, a level substantially higher than the average
interest-bearing liabilities of $101.3 million during 1998. Growth in average
certificates of deposit, totaling $104.9 million, comprised 71% of the increase
in average interest-bearing liabilities between 1999 and 1998. The certificates
of deposit growth during 1999 equated to an increase in interest expense of $5.6
million, although the increase in interest expense was partially offset by a
decline in the average rate from 5.87% in 1998 to 5.56% in 1999, or $0.2
million. The decline in the average rate of certificates of deposit is primarily
due to the aforementioned overall decline of market interest rates during the
latter part of 1998 and early part of 1999.
Growth in our savings deposits and repurchase agreements also added to the
increase in interest expense during 1999 over that of 1998. Average savings
deposits increased significantly during 1999, growing from $17.5 million in 1998
to $38.9 million in 1999. The growth equated to an increase in interest expense
of $1.0 million, although the increase in interest expense was partially offset
by a decline in the average rate from 5.17% in 1998 to 4.81% in 1999, or
approximately $66,000. Average repurchase agreements increased from $10.4
million in 1998 to $20.2 million in 1999 that, after accounting for a decline in
the average rate, added approximately $300,000 to interest expense. Increases in
average interest-bearing checking accounts and money market accounts of $4.6
million and $3.2 million, respectively, also partially offset with a decline in
the average rate, added approximately $300,000 in aggregate to interest expense.
Our September 1999 issuance of $16 million trust preferred securities had a
sizeable impact on interest expense. With an average annualized balance of $4.7
million, trust preferred securities added approximately $500,000 to interest
expense in just the three and one-half months outstanding. The effective rate is
9.81% when taking into account the amortization of brokerage fees.
Reflecting continued significant loan growth the provision for loan losses
totaled approximately $2.0 million during 1999, compared to the $2.6 million
expensed during 1998. The allowance for loan losses as a percentage of total
loans outstanding as of December 31, 1999 was 1.5%, which also represents the
average ratio for 1999 and 1998. Net loan charge-offs during 1999 approximated
$106,000, or only 0.04% of average total loans. There were no loan charge-offs
during 1998. We maintain the allowance for loan losses at a level our management
feels is adequate to absorb losses inherent in the loan portfolio. The
evaluation is based upon a continuous review of ours and the banking industry's
historical loan loss experience, known and inherent risks contained in the loan
portfolio, composition and growth of the loan portfolio, current and projected
economic conditions and other factors.
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Other income totaled $848,000 in 1999, a significant increase over the
$488,000 we earned in 1998. Deposit and repurchase agreement service charges in
1999 totaled $202,000, an increase of approximately $120,000 from the amount
earned in 1998. The increase is primarily due to the growth in the number of
deposit accounts. Reflecting additional letter of credit issuances, letter of
credit commitment fees increased to $268,000 in 1999, an increase of
approximately $109,000 from the fees earned in 1998. Credit card and debit card
interchange income, reflecting increased issuance and usage, increased $69,000
during 1999, totaling $98,000 for the year. Fees earned on referring residential
mortgage loan applicants to various third parties totaled $208,000 in 1999, a
level very similar to the $210,000 earned in 1998.
Noninterest expense during 1999 totaled $5.9 million, a significant
increase over the $3.6 million we expensed in 1998. An increase in all major
overhead cost categories, including salaries and benefits, occupancy, and
furniture and equipment, was recorded. The increases primarily result from the
hiring of additional staff and the construction of a new combined branch and
operations center. All other noninterest costs also increased, reflecting
additional expenses required to administer our significantly increased loan and
deposit base.
Monitoring and controlling overhead expenses, while at the same time
providing high quality of service to customers, is of utmost importance to us.
While the dollar volume of noninterest costs have increased, as a percent of
average assets the level has substantially declined as a result of our growth
and realized operating efficiencies. During 1999 noninterest costs were 2.1% of
average assets, a significant decline from the 2.8% level in 1998. The
efficiency ratio, a banking industry standardized calculation that attempts to
reflect the utilization of overhead costs, also declined significantly during
1999. Computed by dividing noninterest expenses by net interest income plus
noninterest income, our efficiency ratio was 57.3% in 1999. This level compares
very favorably to 70.9% recorded in 1998, and reflects the improved efficiencies
resulting from increased asset growth and controlled costs. In addition, our
lending philosophy of concentrating on commercial lending results in higher
average loan balances compared to residential mortgage or consumer loans, which
provides for a greater volume of loans with fewer people, thereby improving our
efficiency. This point is demonstrated by our total assets per employee ratio,
which as of December 31, 1999 was approximately $6.3 million. This level
compares very favorably to the $3.4 million level of banks of similar asset
size.
Federal income tax expense was $292,000 in 1999, or 12% of pre-tax net
operating income. Although we are subject to the statutory federal income tax
rate of 34%, use of tax loss carryforwards generated during 1997 and 1998
resulting from recorded net operating losses, enabled us to reduce our federal
income tax expense during 1999. The entire tax loss carryforward was utilized
during 1999; therefore, our federal income tax expense will be at the statutory
tax rate in future reporting periods. Because of the aforementioned net loss
from operations recorded by us in 1998, no provisions to federal income tax
expense were necessary during 1998.
CAPITAL RESOURCES -- DECEMBER 31, 2000
Shareholders' equity is a noninterest-bearing source of funds that provides
support for our asset growth. Shareholders' equity was $31.9 million and $28.0
million at December 31, 2000 and 1999, respectively. The increase during 2000 is
attributable to net income from operations totaling $2.8 million and a $1.1
million mark-to-market
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adjustment for available for sale securities as defined in SFAS No. 115. The
mark-to-market adjustment was due to the difference in the interest rate
environment between year-end 2000 and year-end 1999.
In September 1999 we, through the trust, issued 1.6 million shares of trust
preferred stock at $10.00 per share. Net proceeds from the sale, after the
payment of underwriting costs, were $15.0 million. Substantially all of the net
proceeds were ultimately contributed to our bank and were used to support
anticipated growth in assets, fund investments in loans and securities, and for
general corporate purposes. Subject to certain limitations the trust preferred
securities are considered a component of capital for purposes of calculating
regulatory capital ratios. At December 31, 2000, $10.5 million of the $16.0
million was included as Tier 1 capital, with the remaining amount included as
Tier 2 capital.
To provide sufficient capital for anticipated asset growth, we have been
evaluating alternatives for increasing our capital. On February 21, 2001 we sold
70,000 shares of common stock in a private placement for approximately $1.0
million. We contributed the proceeds to our bank as capital.
LIQUIDITY -- DECEMBER 31, 2000
Our liquidity strategy is to fund loan growth with deposits and repurchase
agreements and to maintain an adequate level of short- and medium-term
investments to meet typical daily loan and deposit activity. Although deposit
and repurchase agreement growth from depositors located in the market area
increased by $29.0 million, or 22%, during 2000, the growth was not sufficient
to meet the substantial loan growth of $121.8 million and provide monies for
additional investing activities. To assist in providing the additional needed
funds we regularly obtained certificates of deposit from customers outside of
the market area. As of December 31, 2000, out-of-area deposits totaled $299.0
million, or 65% of combined deposits and repurchase agreements, an increase from
the $191.5 million, or 59% of combined deposits and repurchase agreements, as of
December 31, 1999.
We have the ability to borrow money on a daily basis through correspondent
banks using established federal funds purchased lines; however, this is viewed
as only a secondary and temporary source of funds. The federal funds purchased
lines were utilized on only rare occasions during 2000. During 2000, our federal
funds sold position averaged $9.0 million. In addition, as a member of the
FHLBI, we have access to the FHLBI's borrowing programs. Based on ownership of
FHLBI stock and available collateral at December 31, 2000, our bank could borrow
up to $15.0 million.
In addition to normal loan funding and deposit flow, we also need to
maintain liquidity to meet the demands of certain unfunded loan commitments and
standby letters of credit. As of December 31, 2000, we had a total of $121.5
million in unfunded loan commitments and $36.9 million in unfunded standby
letters of credit. Of the total unfunded loan commitments, $101.4 million were
commitments available as lines of credit to be drawn at any time as customers'
cash needs vary, and $20.1 million were for loan commitments scheduled to close
and become funded within the next three months. We monitor fluctuations in loan
balances and commitment levels, and include such data in our overall liquidity
management.
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BUSINESS
OVERVIEW
We are a single bank holding company headquartered in Grand Rapids,
Michigan that provides commercial and retail banking services primarily to
small- to medium-sized businesses based in and around Grand Rapids. We were
incorporated on July 15, 1997 under the laws of the State of Michigan. Through
our bank subsidiary, Mercantile Bank of West Michigan, we serve principally the
Kent and Ottawa Counties of western Michigan. We formed Mercantile Bank Mortgage
Company, a wholly owned subsidiary of our bank, in October 2000 to increase the
profitability and efficiency of our bank's mortgage loan function. At June 30,
2001, we had total assets of $617.9 million, loans of $508.1 million, deposits
of $520.2 million and shareholders' equity of $40.4 million.
In September 1999, we formed the trust as a wholly-owned business trust
subsidiary for the purpose of issuing 9.60% cumulative preferred securities.
To date we have raised capital from our initial public offering of common
stock in October 1997, a public offering of common stock in July 1998, issuance
of cumulative preferred securities in September 1999, and private placements of
common stock in the first quarter of 2001.
Our election to become a financial holding company pursuant to Title I of
the Gramm-Leach-Bliley Act and implementing regulations of the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board") was
effective March 23, 2000. We have no current plans to engage in any of the
expanded activities permitted under the new regulations.
OUR BANK
Our bank is a state banking corporation that operates under the laws of the
State of Michigan, pursuant to a charter issued by the Division of Financial
Institutions of the Michigan Department of Consumer & Industry Services. Our
bank's deposits are insured to the maximum extent provided by the Federal
Deposit Insurance Corporation.
Through its main office in Grand Rapids, Michigan and its combined branch
and operations center located in Comstock Park, a nearby suburb, our bank
provides a wide variety of commercial banking services, primarily to businesses,
individuals and governmental units. Our bank makes secured and unsecured
commercial, construction, mortgage and consumer loans, and accepts checking,
savings and time deposits. Our bank owns two automated teller machines ("ATM")
that participate in the MAC and NYCE regional network systems, as well as other
ATM networks throughout the country. Customers are also able to conduct certain
loan and deposit transactions by telephone and personal computer. Courier
service is provided to certain commercial customers, and safe deposit facilities
are available at both locations. Our bank does not have trust powers.
GROWTH HISTORY
We have grown significantly since our bank opened in December 1997. We
posted our first profit in the third quarter of 1998, only nine months after our
bank opened. Since inception, management has focused on achieving profitable
internal growth while maintaining strong asset quality. At June 30, 2001, our
assets exceeded $600.0 million and
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our non-performing loans were 0.03% of loans. A number of factors have
contributed to our growth:
- our experienced management team has extensive long-term relationships and
a strong reputation within the western Michigan business community;
- a track record of customer attentiveness and responsive service;
- achieving the size and visibility to be a major competitor for commercial
loans in our markets; and
- over the past four years, the Grand Rapids financial services market has
undergone continued market disruption as the largest local banks have
been acquired by out-of-state institutions.
We believe the combination of these factors has contributed to our strong
historical performance and will provide significant opportunities for continued
growth and profitability.
OPERATING STRATEGY
The key elements of our operating strategy are presented below.
Focus on locally-owned and operated businesses. Our lending activities
focus primarily on providing local businesses with commercial business loans and
loans secured by owner-occupied real estate. Typically, we seek commercial
lending relationships with customers borrowing from $250,000 to $6.0 million.
Our legal lending limit was approximately $12.0 million as of June 30, 2001, and
this limit accommodates the vast majority of credit opportunities we encounter.
If local businesses have credit needs beyond the scope of our lending capacity,
we will often look to participate out a portion of the credit with other
financial institutions in order to accommodate our customers' needs. As of June
30, 2001, we had six relationships borrowing more than $5.0 million from our
bank.
Employing fewer, but highly qualified and productive individuals and
focusing on low net overhead ratios. Key to our growth and profitability is our
management's extensive experience in providing community banking services and
our ability to create a culture committed to both proactive sales and
disciplined credit quality. Our practice of employing fewer, but highly
qualified and productive individuals at all levels of the organization is key to
maintaining a decentralized management structure. These individuals are able to
manage large loan portfolios, which increases interest income while controlling
personnel costs. Our commercial lending focus allows us to generate larger
relationships than a retail focus would allow, which permits us to accelerate
asset growth with fewer resources. We believe our organizational structure and
loan focus will allow us to continue to improve and maintain our favorable net
overhead ratios as our bank matures.
Operating a limited number of offices with a high asset base per
office. We currently have two full-service branches. We actively solicit local
deposits to fund our asset growth. We grew our local deposit base 29.8% in 2000
and 20.3% in the first six months of 2001. However, our loan portfolio has
increased faster than our local deposits. Because of this, our strategy is to
garner out-of-area CDs from across the country at rates competitive with our
local deposit market in order to help fund our growth. Our ability to attract
adequate funding with minimal branching allows us to grow at a lower overhead
cost. We plan to
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continue using out-of-area deposits because we believe that this source of funds
gives us an efficiency advantage in our market.
Maintaining strong asset quality. Equally important as our growth, is our
emphasis on the quality of our loan portfolio and the adequacy of our reserves.
Since opening, our ratio of annual net charge-offs to average loans has never
been greater than 0.05%, and for the six-months ended June 30, 2001 our ratio
was 0.01%. Our ratio of non-performing loans to loans was 0.03% at June 30,
2001. In addition to controlling provision expense, we believe that strong asset
quality leads to greater operating performance because it minimizes the time and
money spent managing problem assets. At the same time we understand the risks
associated with our loan portfolio and maintain a loan loss reserve that we
believe is appropriate. At June 30, 2001 our ratio of allowance for loan losses
to total loans was 1.47%.
MARKET AREA
Our market area is the Kent and Ottawa Counties of western Michigan,
including the City of Grand Rapids, the second largest city in the State of
Michigan. Kent County, which encompasses most of the Grand Rapids metropolitan
area, has a diverse economy based primarily on manufacturing, retail and service
businesses. Statistically, Kent County has approximately 554,000 people, 200,000
households and a median household income that is estimated to have grown
approximately 65% from 1990 to 2000. Kent County is a significant banking market
in the State of Michigan. According to available industry data, as of June 30,
2000, total deposits in Kent County, including those of banks and thrifts, were
approximately $8.5 billion.
OUR MORTGAGE COMPANY
Our mortgage company commenced operations on October 24, 2000, when our
bank contributed most of its residential mortgage loan portfolio and
participation interests in certain commercial mortgage loans to our mortgage
company. On the same date, our bank also transferred its residential mortgage
origination function to our mortgage company. Mortgage loans originated and held
by our mortgage company are serviced by our bank pursuant to a servicing
agreement.
THE TRUST
In 1999, we formed the trust as a Delaware business trust. The trust's
business and affairs are conducted by its property trustee, a Delaware trustee,
and three individual administrative trustees who are officers of the company.
The trust was established for the purpose of issuing and selling its preferred
securities and common securities, and using the proceeds to acquire subordinated
debentures that we issued. Substantially all of the net proceeds that we
received from the transaction were contributed to our bank as capital.
EFFECT OF GOVERNMENT MONETARY POLICIES
Our earnings are affected by domestic economic conditions and the monetary
and fiscal policies of the United States government, its agencies, and the
Federal Reserve Board. The Federal Reserve Board's monetary policies have had,
and will likely continue to have, an important impact on the operating results
of commercial banks through its power to implement national monetary policy in
order to, among other things, curb
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inflation or avoid a recession. The policies of the Federal Reserve Board have a
major effect on the levels of bank loans, investments and deposits through its
open market operations in United States government securities, and through its
regulation of the discount rate on borrowings of member banks and the reserve
requirements against member bank deposits. It is not possible to predict the
nature and impact of future changes in monetary and fiscal policies. Our bank
maintains reserves directly with the Federal Reserve Bank of Chicago to the
extent required by law.
REGULATION AND SUPERVISION
As a bank holding company under the Bank Holding Company Act of 1956, we
are required to file an annual report with the Federal Reserve Board and such
additional information as the Federal Reserve Board may appropriately require.
We are also subject to examination by the Federal Reserve Board.
The Bank Holding Company Act limits the activities of bank holding
companies that have not qualified as financial holding companies to banking and
the management of banking organizations, and to certain non-banking activities.
These non-banking activities include those activities that the Federal Reserve
Board found, by order or regulation as of the day prior to enactment of the
Gramm-Leach-Bliley Act, to be so closely related to banking or managing or
controlling banks as to be a proper incident to those activities.
Non-banking activities that the Federal Reserve Board has, by regulation,
determined are closely related to banking within the meaning of the Bank Holding
Company Act include, among other things:
- operating a mortgage company, finance company, credit card company or
factoring company;
- performing certain data processing operations;
- providing certain investment and financial advice;
- acting as an insurance agent for certain types of credit-related
insurance;
- leasing property on a full-payout, nonoperating basis; and
- providing discount securities brokerage services for customers.
Our mortgage company also complies with the regulations of the Federal Reserve
Board. Neither we nor any of our subsidiaries currently engages in any other
activity referred to above.
In March, 2000, our election to become a financial holding company, as
permitted by the Gramm-Leach-Bliley Act, was accepted by the Federal Reserve
Board. In order to continue as a financial holding company, we and our bank must
satisfy certain statutory requirements regarding capitalization, management, and
compliance with the Community Reinvestment Act. As a financial holding company,
we are permitted to engage in a broader range of activities than are permitted
to bank holding companies.
Those expanded activities include any activity which the Federal Reserve
Board (in certain instances in consultation with the Department of the Treasury)
determines, by order or regulation, to be financial in nature or incidental to
such financial activity, or to be complementary to a financial activity and not
to pose a substantial risk to the safety or
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soundness of depository institutions or the financial system generally. Such
expanded activities include, among others:
- insuring, guaranteeing, or indemnifying against loss, harm, damage,
illness, disability or death, or issuing annuities, and acting as
principal, agent, or broker for such purposes;
- providing financial, investment, or economic advisory services, including
advising a mutual fund; and
- underwriting, dealing in, or making a market in securities.
Neither we nor our subsidiaries have any current plans to engage in any such
expanded activity.
Our bank is subject to certain restrictions imposed by federal law and
regulation. These restrictions apply to any extension of credit to us or to our
other subsidiaries, to investments in stock or other securities that we issue,
to the taking of such stock or securities as collateral for loans to any
borrower, and to acquisitions of assets or services from, and sales of certain
types of assets to, us or our other subsidiaries. Federal law prevents us from
borrowing from our bank unless the loans are secured in designated amounts with
specified forms of collateral.
With respect to the acquisition of banking organizations, we are generally
required to obtain the prior approval of the Federal Reserve Board before we can
acquire all or substantially all of the assets of any bank, or acquire ownership
or control of any voting shares of any bank, if, after the acquisition, we would
own or control more than 5% of the voting shares of the bank. Acquisitions
across state lines are subject to certain state and Federal Reserve Board
restrictions.
LOAN POLICY
As a routine part of our business, we make loans to businesses and
individuals located within our market area. Our loan policy states that the
function of our lending operation is twofold: to provide a means for the
investment of funds at a profitable rate of return with an acceptable degree of
risk, and to meet the credit needs of the creditworthy businesses and
individuals who are our customers. We recognize that in the normal business of
lending, some losses on loans will be inevitable and should be considered a part
of the normal cost of doing business.
Our loan policy anticipates that priorities in extending loans will be
modified from time to time as interest rates, market conditions and competitive
factors change. The policy sets forth guidelines on a nondiscriminatory basis
for lending in accordance with applicable laws and regulations. The policy
describes various criteria in granting loans, including the ability to pay; the
character of the customer; evidence of financial responsibility; purpose of the
loan; knowledge of collateral and its value; terms of repayment; source of
repayment; payment history; and economic conditions.
The Board of Directors has delegated significant lending authority to
officers of our bank. The Board of Directors believes this empowerment,
supported by our strong credit culture and the significant experience of our
commercial lending staff, makes us more responsive to our customers. The loan
policy currently specifies lending authority for certain officers up to $1.0
million, and $6.0 million for our bank's Chairman of the Board
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and its President and Chief Executive Officer; however, the $6.0 million lending
authority is used in rare circumstances where timing is of the essence.
Generally, loan requests exceeding $2.5 million require approval by the Officers
Loan Committee, and loan requests exceeding $3.0 million, up to the bank's legal
lending limit of approximately $12.0 million, require approval by the Board of
Directors. In most circumstances we apply an in-house lending limit that is less
than our bank's legal lending limit.
The loan policy also limits the amount of funds that may be loaned against
specified types of real estate collateral. For certain loans secured by real
estate the policy requires an appraisal of the property offered as collateral by
a state certified independent appraiser. The policy also provides general
guidelines for loan to value limits for other types of collateral, such as
accounts receivable and machinery and equipment. In addition, the loan policy
provides general guidelines as to environmental analysis, loans to employees,
executive officers and directors, problem loan identification, maintenance of an
allowance for loan losses, loan review and grading, mortgage and consumer
lending, and other matters relating to our lending practices.
LENDING ACTIVITY
Commercial Loans. Our commercial lending group originates commercial loans
primarily in our market area. Commercial loans are originated by eight lenders,
with over 110 years of combined commercial lending experience. Loans are
originated for general business purposes, including working capital, accounts
receivable financing, machinery and equipment acquisition, and commercial real
estate financing including new construction and land development.
Working capital loans are often structured as a line of credit and are
reviewed periodically in connection with the borrower's year-end financial
reporting. These loans are generally secured by all of the assets of the
borrower, and have an interest rate tied to the national prime rate. Loans for
machinery and equipment purposes typically have a maturity of three to five
years and are fully amortizing, while commercial real estate loans are usually
written with a five-year maturity and amortized over a 15-year period. These
commercial loans have an interest rate that is fixed to maturity or is tied to
the national prime rate.
We evaluate many aspects of a commercial loan transaction in order to
minimize credit and interest rate risk. Underwriting includes an assessment of
the management, products, markets, cash flow, capital, income and collateral.
This analysis includes a review of the borrower's historical and projected
financial results. Appraisals are generally required by certified independent
appraisers who are well known to us where real estate is the primary collateral,
and in some cases, where equipment is the primary collateral. In certain
situations, for creditworthy customers, we may accept title reports instead of
requiring lenders' policies of title insurance.
Commercial real estate lending involves more risk than residential lending
because loan balances are greater and repayment is dependent upon the borrower's
business operations. We attempt to minimize the risks associated with these
transactions by generally limiting our commercial real estate lending to
owner-operated properties of well-known customers or new customers whose
businesses have an established profitable history. In many cases, risk is
further reduced by limiting the amount of credit to any one borrower to an
amount less than our legal lending limit and avoiding certain types of
commercial real estate financings.
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We have no material foreign or agricultural loans, and no material loans to
energy producing customers.
Single-Family Residential Real Estate Loans. Our mortgage company
originates single-family residential real estate loans in our market area,
usually according to secondary market underwriting standards. Loans not
conforming to those standards are made in limited circumstances. These loans
provide borrowers with a fixed or adjustable interest rate with terms up to 30
years.
Our bank has a home equity line of credit program. Home equity credit is
generally secured by either a first or second mortgage on the borrower's primary
residence. The program provides revolving credit at a rate tied to the national
prime rate.
Consumer Loans. We originate consumer loans for a variety of personal
financial needs, including new and used automobiles, boat loans, credit cards
and overdraft protection for our checking account customers. Consumer loans
generally have shorter terms and higher interest rates and usually involve more
credit risk than single-family residential real estate loans because of the type
and nature of the collateral.
While we do not utilize a formal credit scoring system, management believes
our consumer loans are underwritten carefully, with a strong emphasis on the
amount of the down payment and credit quality, employment stability and monthly
income of the borrower. These loans are generally repaid on a monthly repayment
schedule with the source of repayment tied to the borrower's periodic income. In
addition, consumer lending collections are dependent on the borrower's
continuing financial stability, and are likely to be adversely affected by job
loss, illness and personal bankruptcy. In many cases, repossessed collateral for
a defaulted consumer loan will not provide an adequate source of repayment of
the outstanding loan balance because of depreciation of the underlying
collateral.
Management believes that the generally higher yields earned on consumer
loans compensate for the increased credit risk associated with these loans and
that consumer loans are important to our efforts to serve the credit needs of
the communities and customers that we serve.
LOAN PORTFOLIO QUALITY
We utilize a comprehensive loan grading system for our commercial loans as
well as residential mortgage and consumer loans. Administered as part of the
loan review program, all commercial loans are graded on an eight grade rating
system. The rating system utilizes a standardized grade paradigm that analyzes
several critical factors such as cash flow, management and collateral coverage.
All commercial loans are graded at inception and later at various intervals.
Residential mortgage and consumer loans are graded on a four grade rating system
using a separate standardized grade paradigm that analyzes several critical
factors such as debt-to-income and credit and employment histories. Residential
mortgage and consumer loans are generally only graded once after the loans are
made.
Our independent loan review program is primarily responsible for the
administration of the loan grading systems and ensuring adherence to established
loan policies and procedures. The loan review program is an integral part of
maintaining our strong asset quality culture. The loan review function works
closely with senior management, although it functionally reports to the Board of
Directors. All commercial loan relationships exceeding $1 million are formally
reviewed at least annually. Watch list credits are
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formally reviewed monthly. Credits between $0.5 million but less than $1 million
are formally reviewed every two years, with a random sampling performed on
credits under $0.5 million.
Loans are placed in a nonaccrual status when, in the opinion of management,
uncertainty exists as to the ultimate collection of principal and interest. For
the six-month period ended June 30, 2001, loans placed on nonaccrual status were
nominal in amount. At June 30, 2001, there were no significant loans where known
information about possible credit problems of borrowers causes management to
have serious doubts as to the ability of the borrower to comply with present
loan repayment terms. Management is not aware of any potential problem loans
that could have a material effect on our operating results, liquidity, or
capital resources. Management is not aware of any other factors that would cause
future net loan charge-offs, in total and by loan category, to significantly
differ from those experienced by institutions of similar size.
ALLOWANCE FOR LOAN LOSSES
In each accounting period, the allowance for loan losses is adjusted by
management to the amount management believes is necessary to maintain the
allowance for loan losses at adequate levels. Through its loan review and credit
departments, management attempts to allocate specific portions of the allowance
for loan losses based on specifically identifiable problem loans. Management's
evaluation of the allowance for loan losses is further based on, but not limited
to, consideration of internally prepared calculations based upon the experience
of senior management and lending staff making similar loans in the same
community over the past 15 years, composition of the loan portfolio, third party
analysis of the loan administration processes, and loan portfolio and general
economic conditions. In addition, our bank's status as a relatively new banking
organization and the rapid loan growth since inception is taken into account.
Management believes that the present allowance for loan losses is adequate,
based on the broad range of considerations listed above.
The primary risks associated with commercial loans are the financial
condition of the borrower, the sufficiency of collateral, and lack of timely
payment. Management has a policy of requesting and reviewing periodic financial
statements from its commercial loan customers, and periodically reviews
existence of collateral and its value. The primary risks considered by
management with respect to each consumer and residential real estate loan is
lack of timely payment. Management has a reporting system that monitors past due
loans and has adopted policies to pursue its creditor's rights in order to
preserve our collateral position.
Although management believes that the allowance for loan losses is adequate
to absorb losses as they arise, there can be no assurance that we will not
sustain losses in any given period which could be substantial in relation to, or
greater than, the size of the allowance for loan losses.
INVESTMENTS
Our principal investments are our investment in the common stock of our
bank and the common securities of the trust. Our funds may be invested from time
to time in various debt instruments, including obligations of or guaranteed by
the United States, general obligations of a state or political subdivision or an
agency of a state or political subdivision, banker's acceptances or certificates
of deposit of United States commercial
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banks, or commercial paper of United States issuers rated in the highest
category by a nationally-recognized investment rating service. We are permitted
to make unlimited portfolio investments in equity securities and to make equity
investments in subsidiary corporations engaged in certain non-banking
activities, including real estate-related activities such as mortgage banking,
community development, real estate appraisals, arranging equity financing for
commercial real estate, and owning and operating real estate used substantially
by our bank or acquired for its future use. However, we have no present plans to
make any of these equity investments. Our Board of Directors may alter our
investment policy at any time without shareholder approval.
Our bank may invest its funds in a wide variety of debt instruments and may
participate in the federal funds market with other depository institutions.
Subject to certain exceptions, our bank is prohibited from investing in equity
securities. Under one exception, in certain circumstances and with the prior
approval of the FDIC, our bank could invest up to 10% of its total assets in the
equity securities of a subsidiary corporation engaged in the acquisition and
development of real property for sale, or the improvement of real property by
construction or rehabilitation of residential or commercial units for sale or
lease. Our bank has no present plans to make such an investment. Real estate
acquired by our bank in satisfaction of or foreclosure upon loans may be held by
our bank. Our bank is also permitted to invest in such real estate as is
necessary for the convenient transaction of its business. Our bank's Board of
Directors may alter the investment policy without shareholder approval at any
time.
COMPETITION
Our primary market area for loans and core deposits is the Kent and Ottawa
Counties of western Michigan, which includes the City of Grand Rapids, the
second largest city in the State of Michigan. We face substantial competition in
all phases of our operations from a variety of different competitors. We compete
for deposits, loans and other financial services with numerous Michigan-based
and out-of-state banks, thrifts, credit unions and other financial institutions
as well as other entities that provide financial services. Some of the financial
institutions and financial service organizations with which we compete are not
subject to the same degree of regulation as we are. Most of our competitors have
been in business for many years, have established customer bases, are larger,
have substantially higher lending limits than we do, and offer branch networks
and other services which we do not, including brokerage, insurance, trust,
mutual fund and international banking services. Most of these entities have
greater capital resources than we do, which, among other things, may allow them
to price their services at levels more favorable to the customer and to provide
larger credit facilities than we do. Under the Gramm-Leach-Bliley Act of 1999,
effective March 11, 2000, securities firms and insurance companies that elect to
become financial holding companies may acquire banks and other financial
institutions. The Gramm-Leach-Bliley Act may significantly change the
competitive environment in which we conduct our business. The financial services
industry is also likely to become more competitive as further technological
advances enable more companies to provide financial services.
PROPERTIES
Our bank leases a one story building in downtown Grand Rapids, Michigan for
use as its main office and our headquarters. This building is of masonry
construction and has approximately 11,000 square feet of usable space with
on-site parking. The lease for this
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facility, which commenced in 1997, has an initial term of ten years, and four,
five-year renewal options. The address of this facility is 216 North Division
Avenue, and is located between Lyon Street and Michigan Street in downtown Grand
Rapids.
Our bank designed and constructed a full service branch and operations
facility in Alpine Township, a northwest suburb of Grand Rapids, that opened in
July of 1999. The facility is one story, of masonry construction, and has
approximately 8,000 square feet of usable space. The land and building is owned
by our bank. The facility has multiple drive-through lanes and ample parking
space. The address of this facility is 4613 Alpine Avenue NW, Comstock Park,
Michigan.
In October 2000, construction began on two new facilities, both of which
are being built on a 4-acre parcel of land purchased by our bank earlier in
2000. The land is located in the City of Wyoming, a southwest suburb of Grand
Rapids. The larger of the two buildings, a two-story facility of masonry
construction with approximately 25,000 square feet of usable space, will serve
as the new location for our operations and accounting departments and will
include a full service branch. The other building, a single-story facility of
masonry construction with approximately 7,000 square feet of usable space, will
accommodate our administration function. The facilities, which will be owned by
our bank, are scheduled to open later this year. The location of these
facilities will be on the southeast corner of 56th Street and Byron Center
Avenue, Wyoming, Michigan.
EMPLOYEES
As of June 30, 2001, we employed 72 full-time and 15 part-time persons. We
believe that our relations with our employees are good.
LEGAL PROCEEDINGS
From time to time, we may be involved in various legal proceedings that are
incidental to our business. In the opinion of management, we are not a party to
any current legal proceedings that are material to our financial condition,
either individually or in the aggregate.
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DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 9,000,000 shares of common stock
and 1,000,000 shares of preferred stock. As of the date of this prospectus,
there are 3,112,702 shares of common stock issued and outstanding. We have not
issued any shares of preferred stock.
Michigan law allows our Board of Directors to issue additional shares of
stock up to the total amount of common stock and preferred stock authorized
without obtaining the prior approval of our shareholders. In some circumstances,
the rules of the Nasdaq National Market, on which our common stock is quoted,
may require that we obtain shareholder approval before issuing shares.
PREFERRED STOCK
Our Board of Directors is authorized to issue preferred stock, in one or
more series, from time to time, with such voting powers, full or limited but not
to exceed one vote per share, or without voting powers, and with such
designations, preferences and relative, participating, optional or other special
rights, and qualifications, limitations or restrictions thereof, as may be
provided in the resolution or resolutions adopted by the Board of Directors. The
authority of the Board of Directors includes, but is not limited to, the
determination or fixing of the following with respect to shares of such class or
any series thereof:
- the number of shares and designation of such series;
- the dividend rate and whether dividends are to be cumulative;
- whether shares are to be redeemable, and, if so, whether redeemable for
cash, property or rights;
- the rights to which the holders of shares shall be entitled, and the
preferences, if any, over any other series;
- whether the shares shall be subject to the operation of a purchase,
retirement or sinking fund, and, if so, upon what conditions;
- whether the shares shall be convertible into or exchangeable for shares
of any other class or of any other series of any class of capital stock
and the terms and conditions of such conversion or exchange;
- the voting powers, full or limited, if any, of the shares;
- whether the issuance of any additional shares, or of any shares of any
other series, shall be subject to restrictions as to issuance, or as to
the powers, preferences or rights of any such other series; and
- any other preferences, privileges and powers and relative, participating,
optional or other special rights and qualifications, limitations or
restrictions.
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COMMON STOCK
Dividend Rights
Subject to any prior rights of any holders of preferred stock then
outstanding, the holders of our common stock will be entitled to dividends when,
as and if declared by our Board of Directors out of funds legally available for
dividends. Under Michigan law, dividends may be legally declared or paid only if
after the distribution we can pay our debts as they come due in the usual course
of business and our total assets equal or exceed the sum of our liabilities plus
the amount that would be needed to satisfy the preferential rights upon
dissolution of any holders of preferred stock then outstanding whose
preferential rights are superior to those receiving the distribution.
Voting Rights
Subject to the rights, if any, of holders of shares of our preferred stock
then outstanding, all voting rights are vested in the holders of shares of our
common stock. Each share of common stock entitles the holder to one vote on all
matters, including the election of directors. Our shareholders do not have
cumulative voting rights.
Preemptive Rights
Holders of common stock do not have preemptive rights.
Liquidation Rights
Subject to any rights of any preferred stock then outstanding, holders of
our common stock are entitled to share on a pro rata basis in our net assets
which remain after satisfaction of all liabilities.
Transfer Agent
State Street Bank & Trust Company of Boston, Massachusetts, serves as the
transfer agent of our common stock. We are in the process of transitioning to
EquiServe Trust Company, N.A. of Canton, Massachusetts.
CERTAIN CHARTER PROVISIONS
The following provisions of our Articles of Incorporation may delay, defer,
prevent, or make it more difficult for a person to acquire us or to change
control of our Board of Directors, reducing our vulnerability to an unsolicited
takeover attempt.
Classification of the Board of Directors
Our Articles of Incorporation provide that our Board of Directors is
divided into three classes with staggered terms; each class to be as nearly
equal in number as possible. Each director is elected for a three year term.
Approximately one-third of the Board positions are filled by a shareholder vote
each year. Our Articles of Incorporation provide that the number of directors
shall be fixed by a majority of the Board, but shall be no fewer than six and no
more than fifteen members.
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Removal of Directors
The Michigan Business Corporation Act provides that, unless the articles of
incorporation otherwise provide, shareholders may remove a director or the
entire Board of Directors with or without cause. Our Articles of Incorporation
provide that a director may be removed only for cause and only by the
affirmative vote of the holders of a majority of the voting power of all the
shares of the company entitled to vote generally in the election of directors.
Filling Vacancies on the Board of Directors
Our Articles of Incorporation provide that any vacancies in the Board, or
newly created director positions, may be filled by vote of the directors then in
office. A new director chosen to fill a vacancy on the Board of Directors will
serve for the remainder of the full term of the class in which the vacancy
occurred.
Nominations of Director Candidates
Our Articles of Incorporation include a provision governing nominations of
director candidates. Nominations for the election of directors may be made by
the Board of Directors, a nominating committee appointed by the Board of
Directors, or any shareholder entitled to vote for directors. In the case of a
shareholder nomination, the Articles of Incorporation provide certain procedures
that must be followed. A shareholder intending to nominate candidates for
election must deliver written notice containing certain specified information to
the Secretary of the company at least sixty (60) days but not more than ninety
(90) days prior to the anniversary date of the immediately preceding annual
meeting of shareholders.
Certain Shareholder Action
Our Articles of Incorporation require that any shareholder action must be
taken at an annual or special meeting of shareholders, that any meeting of
shareholders must be called by the Board of Directors or the Chairman of the
Board, and, unless otherwise provided by law, prohibit shareholder action by
written consent. Our shareholders are not permitted to call a special meeting of
shareholders or require that the Board call such a special meeting. The Michigan
Business Corporation Act permits shareholders holding 10% or more of all of the
shares entitled to vote at a meeting to request the Circuit Court of the County
in which our principal place of business or registered office is located to
order a special meeting of shareholders for good cause shown.
Increased Shareholders Vote for Alteration, Amendment or Repeal of Article
Provisions
Our Articles of Incorporation require the affirmative vote of the holders
of at least 66 2/3 percent of the voting stock of the company entitled to vote
generally in the election of directors for the alteration, amendment or repeal
of, or the adoption of any provision inconsistent with the foregoing provisions
of our Articles of Incorporation.
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CERTAIN ANTI-TAKEOVER PROVISIONS
Michigan Fair Price Act
Certain provisions of the Michigan Business Corporation Act establish a
statutory scheme similar to the supermajority and fair price provisions found in
many corporate charters (the "Fair Price Act"). The Fair Price Act provides that
a supermajority vote of 90 percent of the shareholders and no less than
two-thirds of the votes of noninterested shareholders must approve a "business
combination." The Fair Price Act defines a "business combination" to encompass
any merger, consolidation, share exchange, sale of assets, stock issue,
liquidation, or reclassification of securities involving an "interested
shareholder" or certain "affiliates." An "interested shareholder" is generally
any person who owns 10 percent or more of the outstanding voting shares of the
company. An "affiliate" is a person who directly or indirectly controls, is
controlled by, or is under common control with, a specified person.
The supermajority vote required by the Fair Price Act does not apply to
business combinations that satisfy certain conditions. These conditions include,
among others: (i) the purchase price to be paid for the shares of the company in
the business combination must be at least equal to the highest of either (a) the
market value of the shares or (b) the highest per share price paid by the
interested shareholder within the preceding two-year period or in the
transaction in which the shareholder became an interested shareholder, whichever
is higher; (ii) once becoming an interested shareholder, the person may not
become the beneficial owner of any additional shares of the company except as
part of the transaction which resulted in the interested shareholder becoming an
interested shareholder or by virtue of proportionate stock splits or stock
dividends; and (iii) five years must have elapsed since the person involved
became an interested shareholder.
The requirements of the Fair Price Act do not apply to business
combinations with an interested shareholder that the Board of Directors has
approved or exempted from the requirements of the Fair Price Act by resolution
prior to the time that the interested shareholder first became an interested
shareholder.
Control Share Act
The Michigan Business Corporation Act regulates the acquisition of "control
shares" of large public Michigan corporations (the "Control Share Act"). The
Control Share Act establishes procedures governing "control share acquisitions."
A control share acquisition is defined as an acquisition of shares by an
acquiror which, when combined with other shares held by that person or entity,
would give the acquiror voting power, alone or as part of a group, at or above
any of the following thresholds: 20 percent, 33 1/3 percent or 50 percent. Under
the Control Share Act, an acquiror may not vote "control shares" unless the
corporation's disinterested shareholders (defined to exclude the acquiring
person, officers of the target corporation, and directors of the target
corporation who are also employees of the corporation) vote to confer voting
rights on the control shares. The Control Share Act does not affect the voting
rights of shares owned by an acquiring person prior to the control share
acquisition.
The Control Share Act entitles corporations to redeem control shares from
the acquiring person under certain circumstances. In other cases, the Control
Share Act
53
57
confers dissenters' rights upon all of the corporation's shareholders except the
acquiring person.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Articles of Incorporation provide that we shall indemnify our present
and past directors, officers, and such other persons as the Board of Directors
may authorize to the full extent permitted by law.
Our Bylaws contain indemnification provisions concerning third party
actions as well as actions in the right of the company. The Bylaws provide that
we shall indemnify any person who was or is a party or is threatened to be made
a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the company) by reason of the fact that he or she is or
was a director or officer of the company or while serving as such a director or
officer, is or was serving at the request of the company as a director, officer,
partner, trustee, employee or agent of another foreign or domestic corporation,
partnership, joint venture, trust or other enterprise, whether for profit or
not, against expenses (including attorney's fees), judgments, penalties, fees
and amounts paid in settlement actually and reasonably incurred by him or her in
connection with such action, suit or proceeding if he or she acted in good faith
and in a manner he or she reasonably believed to be in or not opposed to the
best interests of the company or its shareholders and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful.
Federal Deposit Insurance Corporation regulations impose limitations on
indemnification payments which could restrict, in certain circumstances,
payments by us or our bank to our respective directors or officers otherwise
permitted under the Michigan Business Corporation Act or the Michigan Banking
Code.
With respect to derivative actions, the Bylaws provide that we shall
indemnify any person who was or is a party to or is threatened to be made a
party to any threatened, pending or completed action or suit by or in the right
of the company to procure a judgment in its favor by reason of the fact that he
or she is or was a director or officer of the company, or while serving as such
a director or officer, is or was serving at the request of the company as a
director, officer, partner, trustee, employee or agent of another foreign or
domestic corporation, partnership, joint venture, trust or other enterprise,
whether for profit or not, against expenses (including attorney's fees) and
amounts paid in settlement actually and reasonably incurred by him or her in
connection with the action or suit if he or she acted in good faith and in a
manner he or she reasonably believed to be in or not opposed to the best
interests of the company or its shareholders. No indemnification is provided in
the Bylaws in respect of any claim, issue or matter in which such person has
been found liable to us except to the extent that a court of competent
jurisdiction determines upon application that, despite the adjudication of
liability but in view of all circumstances of the case, such person is fairly
and reasonably entitled to indemnity for such expenses which such court shall
deem proper.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
company pursuant to the provisions discussed above or otherwise, we have been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable.
54
58
Under an insurance policy maintained by us, our directors and officers are
insured within the limits and subject to the limitations of the policy, against
specified expenses in connection with the defense of specified claims, actions,
suits or proceedings, and specified liabilities which might be imposed as a
result of claims, actions, suits or proceedings, which may be brought against
them by reason of being or having been directors and officers of our company.
Limitation of Director Liability
The Michigan Business Corporation Act permits corporations to limit the
personal liability of their directors in certain circumstances. Our Articles of
Incorporation provide that our directors shall not be personally liable to us or
our shareholders for monetary damages for breach of the director's fiduciary
duty. However, they do not eliminate or limit the liability of a director for
any breach of a duty, act or omission for which the elimination or limitation of
liability is not permitted by the Michigan Business Corporation Act, currently
including, without limitation, the following: (1) breach of the director's duty
of loyalty to us or our shareholders; (2) acts or omissions not in good faith or
that involve intentional misconduct or a knowing violation of the law; (3)
illegal loans, distributions of dividends or assets, or stock purchases as
described in Section 551(1) of the Michigan Business Corporation Act; and (4)
transactions from which the director derived an improper personal benefit.
55
59
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement among us
and the underwriters named below, for whom Stifel, Nicolaus & Company,
Incorporated, Howe Barnes Investments, Inc. and Tucker Anthony Incorporated are
acting as representatives, the underwriters have severally agreed to purchase
from us, and we have agreed to sell to them, an aggregate of 1,200,000 shares of
common stock in the amounts set forth below opposite their respective names.
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
Stifel, Nicolaus & Company, Incorporated....................
Howe Barnes Investments, Inc. ..............................
Tucker Anthony Incorporated.................................
---------
Total.................................................. 1,200,000
=========
Under the terms and conditions of the underwriting agreement, the
underwriters are committed to accept and pay for all of the shares, if any are
taken. If an underwriter defaults, the underwriting agreement provides that the
purchase commitments of the non-defaulting underwriters may be increased or, in
certain cases, the underwriting agreement may be terminated. In the underwriting
agreement, the obligations of the underwriters are subject to approval of
certain legal matters by their counsel, including, without limitation, the
authorization and the validity of the shares, and to various other conditions
contained in the underwriting agreement, such as receipt by the underwriters of
officers' certificates and legal opinions.
The underwriters propose to offer the shares of common stock to the public
at the public offering price set forth on the cover page of this prospectus, and
to certain securities dealers (who may include the underwriters) at such price,
less a concession not in excess of $ per share. The underwriters may allow,
and the selected dealers may reallow, a concession not in excess of $ per
share to certain brokers and dealers. After the offering, the offering price and
other selling terms may from time to time be changed by the underwriters.
We have granted to the underwriters an option, exercisable within 30 days
after the date of this prospectus, to purchase up to 180,000 additional shares
of our common stock solely to cover over-allotments, if any, at the same price
per share to be paid by the underwriters for the other shares of common stock in
this offering. If the underwriters purchase any additional shares under this
option, each underwriter will be committed to purchase the additional shares in
approximately the same proportion allocated to them in the table above.
The following table shows the underwriting fees to be paid to the
underwriters in connection with this offering. These amounts are shown assuming
both no exercise and full exercise of the over-allotment option.
NO EXERCISE FULL EXERCISE
----------- -------------
Per Share.............................................. $ $
Total............................................. $ $
56
60
In connection with the offering, the underwriters may engage in
transactions that are intended to stabilize, maintain or otherwise affect the
price of the common stock during and after the offering, such as the following:
- The underwriters may over-allot or otherwise create a short position in
the common stock for their own account by selling more shares of common
stock than have been sold to them;
- The underwriters may elect to cover any such short position by purchasing
shares of common stock in the open market or by exercising the
over-allotment option;
- The underwriters may stabilize or maintain the price of the common stock
by bidding;
- The underwriters may impose penalty bids, under which selling concessions
allowed to syndicate members or other broker-dealers participating in the
offering are reclaimed if shares of common stock previously distributed
in the offering are repurchased in connection with stabilization
transactions or otherwise; and
- The underwriters may engage in passive market-making transactions.
The effect of these transactions may be to stabilize or maintain the market
price of the common stock at a level above that which might otherwise prevail in
the open market. The imposition of a penalty bid may also affect the price of
the common stock to the extent that it discourages resales of the common stock.
The magnitude or effect of any stabilization or other transactions is uncertain.
These transactions may be effected on the Nasdaq National Market or otherwise
and, if commenced, may be discontinued at any time.
In connection with this offering, some underwriters may also engage in
passive market making transactions in the common stock on the Nasdaq National
Market. Passive market making consists of displaying bids on the Nasdaq National
Market limited by the prices of independent market makers and effecting
purchases limited by those prices in response to order flow. Rule 103 of
Regulation M promulgated by the SEC limits the amount of net purchases that each
passive market maker may make and the displayed size of each bid. Passive market
making may stabilize the market price of the common stock at a level above that
which might otherwise prevail in the open market and, if commenced, may be
discontinued at any time.
We have agreed to indemnify the underwriters and their controlling persons
against specified liabilities, including liabilities under the Securities Act of
1933, as amended, or to contribute to payments that the underwriters may be
required to make for such liabilities.
We and each of our executive officers and directors have agreed that for a
period of 90 days after the date of this prospectus, we and they will not,
without the prior written consent of Stifel, Nicolaus & Company, Incorporated,
directly or indirectly offer for sale, sell, contract to sell, sell any option
or contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant for the sale of or otherwise dispose of or transfer
(subject to certain exceptions) any shares of our common stock or securities
convertible into or exchangeable or exercisable for shares of our common stock.
Certain of the underwriters engage in transactions with, and from time to
time, have performed services for, us and our subsidiaries in the ordinary
course of business.
57
61
LEGAL MATTERS
The validity of the shares of our common stock offered by this prospectus
are being passed upon for us by Dickinson Wright PLLC, Detroit and Grand Rapids,
Michigan. Certain legal matters relating to this offering are being passed upon
for the underwriters by Vedder, Price, Kaufman & Kammholz, Chicago, Illinois.
EXPERTS
Our consolidated financial statements as of December 31, 2000 and 1999 and
for the years ended December 31, 2000, 1999 and 1998, included in this
prospectus have been audited by Crowe, Chizek and Company LLP, independent
public accountants, as indicated in their report accompanying the financial
statements. These financial statements are included in reliance upon this report
given upon the authority of Crowe, Chizek and Company LLP as experts in auditing
and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We file reports, proxy statements and other information with the SEC, as
required. You may read and copy the reports, proxy statements and other
information at the public reference room maintained by the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549. The Public Reference Section of the SEC at
450 Fifth Street, N.W., Washington, D.C. 20549 may also provide, at prescribed
rates, copies of such material. You may obtain information on the operation of
the SEC's public reference room by calling the SEC at 1-800-SEC-0330. The SEC
also maintains a web site that contains reports, proxy and information
statements and other information regarding registrants, including us, that file
electronically with the SEC. The address of the site is http://www.sec.gov. You
may also inspect reports and other information concerning us at the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006. Our web site address is: http://www.mercbank.com.
We have filed a registration statement with the SEC in accordance with the
provisions of the Securities Act of 1933. This prospectus does not contain all
of the information set forth in the registration statement, certain portions of
which have been omitted as permitted by the rules and regulations of the SEC.
For further information about this offering and us, reference is made to the
registration statement, including the exhibits filed as a part of this
registration statement.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents, which we have filed with the SEC, are incorporated
by reference in this prospectus:
(1) Our annual report on Form 10-K for the fiscal year ended December
31, 2000; and
(2) Our reports on Form 10-Q for the quarters ended March 31, 2001 and
June 30, 2001.
58
62
All documents that we file with the SEC pursuant to Section 13(a), 13(c),
14 or 15(d) of the Securities Exchange Act of 1934 after the date of this
prospectus and before the termination of this offering of the shares of our
common stock shall be deemed incorporated by reference in this prospectus and to
be a part of this prospectus from the respective dates of filing these
documents.
We will provide without charge to each person to whom a copy of this
prospectus is delivered, upon the person's written or oral request, a copy of
any and all of the information incorporated by reference in this prospectus,
other than exhibits to these documents, unless the exhibits are specifically
incorporated by reference into the information that this prospectus
incorporates. Requests should be directed in writing to Robert B. Kaminski,
Senior Vice President and Secretary, at Mercantile Bank Corporation, 216 North
Division Avenue, Grand Rapids, Michigan 49503; or by phone at (616) 242-9000.
Any statement contained in a document incorporated or deemed to be
incorporated by reference in this prospectus shall be deemed modified,
superseded or replaced for purposes of this prospectus to the extent that a
statement contained in this prospectus or in any subsequently filed document
that also is or is deemed to be incorporated by reference in this prospectus
modifies, supersedes or replaces that statement. Any statement that is modified,
superseded or replaced shall not be deemed, except as so modified, superseded or
replaced, to constitute a part of this prospectus.
59
63
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
MERCANTILE BANK CORPORATION
Report of Independent Auditors.............................. F-2
Consolidated Financial Statements
Consolidated Balance Sheets............................... F-3
Consolidated Statements of Income......................... F-4
Consolidated Statements of Changes in Shareholders'
Equity................................................. F-5
Consolidated Statements of Cash Flows..................... F-6
Notes to Consolidated Financial Statements................ F-7
F-1
64
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Mercantile Bank Corporation
Grand Rapids, Michigan
We have audited the accompanying consolidated balance sheets of Mercantile
Bank Corporation as of December 31, 2000 and 1999 and the related consolidated
statements of income, changes in shareholders' equity and cash flows for each of
the three years in the period ended December 31, 2000. These financial
statements are the responsibility of Mercantile's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Mercantile
Bank Corporation as of December 31, 2000 and 1999, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States of America.
As disclosed in Note 1, the Corporation changed its method of accounting
for start-up costs in 1999 to comply with new accounting guidance.
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
January 19, 2001, except Note 15
which is dated
March 22, 2001
F-2
65
MERCANTILE BANK CORPORATION
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31, DECEMBER 31,
2001 2000 1999
------------ ------------ ------------
(UNAUDITED)
ASSETS
Cash and due from banks................. $ 14,719,854 $ 11,692,825 $ 6,570,631
Short term investments.................. 141,552 108,846 579,725
Federal funds sold...................... 18,400,000 6,300,000 6,500,000
------------ ------------ ------------
Total cash and cash equivalents...... 33,261,406 18,101,671 13,650,356
Securities available for sale........... 47,040,262 45,147,493 34,115,303
Securities held to maturity (fair value
of $20,398,446 at June 30, 2001
(unaudited), $14,942,311 at December
31, 2000 and $6,982,329 at December
31, 1999)............................ 19,799,934 14,524,341 7,056,492
Federal Home Loan Bank stock............ 784,900 784,900 784,900
Total loans............................. 508,110,547 429,804,105 308,006,476
Allowance for loan losses............... (7,462,092) (6,301,805) (4,620,469)
------------ ------------ ------------
Total loans, net..................... 500,648,455 423,502,300 303,386,007
Premises and equipment -- net........... 6,248,243 4,119,385 3,461,187
Accrued interest receivable............. 2,743,594 2,758,054 1,842,874
Other assets............................ 7,360,880 3,808,218 3,739,969
------------ ------------ ------------
Total assets......................... $617,887,674 $512,746,362 $368,037,088
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing.................. $ 38,381,197 $ 27,368,257 $ 19,513,231
Interest-bearing..................... 481,840,849 398,372,056 275,315,741
------------ ------------ ------------
Total........................... 520,222,046 425,740,313 294,828,972
Securities sold under agreements to
repurchase........................... 34,787,643 32,151,391 26,607,289
Other borrowed money.................... 111,627 56,510 13,755
Accrued expenses and other
liabilities.......................... 6,319,043 6,944,262 2,619,203
Guaranteed preferred beneficial
interests in the Corporation's
subordinated debentures.............. 16,000,000 16,000,000 16,000,000
------------ ------------ ------------
Total liabilities.................... 577,440,359 480,892,476 340,069,219
Shareholders' equity
Preferred stock, no par value; 1,000,000
shares authorized, none issued
Common stock, no par value; 9,000,000
shares authorized; 3,112,702,
2,596,102 and 2,472,500 shares
outstanding at June 30, 2001
(unaudited), December 31, 2000 and
1999................................. 36,684,120 29,935,401 28,181,798
Retained earnings....................... 3,320,457 1,628,277 587,639
Accumulated other comprehensive income
(loss)............................... 442,738 290,208 (801,568)
------------ ------------ ------------
Total shareholders' equity........... 40,447,315 31,853,886 27,967,869
------------ ------------ ------------
Total liabilities and shareholders'
equity............................. $617,887,674 $512,746,362 $368,037,088
============ ============ ============
See accompanying notes to consolidated financial statements.
F-3
66
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
------------------------- ---------------------------------------
2001 2000 2000 1999 1998
---- ---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
Interest income
Loans, including fees.......... $19,426,045 $14,994,797 $33,056,700 $20,410,153 $ 9,007,668
Investment securities.......... 2,078,589 1,442,533 3,206,105 1,925,065 880,639
Federal funds sold............. 360,021 271,768 567,379 405,659 256,422
Short term investments......... 2,237 3,351 5,464 25,822 23,487
----------- ----------- ----------- ----------- -----------
Total interest income........ 21,866,892 16,712,449 36,835,648 22,766,699 10,168,216
Interest expense
Deposits....................... 13,278,622 9,553,238 21,619,499 12,039,907 5,140,788
Short term borrowings.......... 641,362 563,640 1,368,901 835,297 488,430
Long term borrowings........... 787,440 794,157 1,571,876 455,216 0
----------- ----------- ----------- ----------- -----------
Total interest expense....... 14,707,424 10,911,035 24,560,276 13,330,420 5,629,218
----------- ----------- ----------- ----------- -----------
NET INTEREST INCOME.............. 7,159,468 5,801,414 12,275,372 9,436,279 4,538,998
Provision for loan losses........ 1,180,000 945,000 1,854,000 1,960,900 2,571,800
----------- ----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES...... 5,979,468 4,856,414 10,421,372 7,475,379 1,967,198
Noninterest income
Service charges on accounts.... 226,158 158,640 346,131 201,796 82,170
Letter of credit fees.......... 150,728 116,036 391,143 267,753 159,064
Mortgage loan referral fees.... 178,412 68,890 174,579 208,042 209,667
Gain on the sale of loans...... 0 40,197 49,975 13,047 0
Gain (loss) on sale of
securities................... 99,594 (275,321) (275,321) 0 128
Interest rate swap termination
fee.......................... 0 275,000 275,000 0 0
Other income................... 120,065 105,749 230,395 156,905 37,149
----------- ----------- ----------- ----------- -----------
Total noninterest income..... 774,957 489,191 1,191,902 847,543 488,178
Noninterest expense
Salaries and benefits.......... 2,645,519 2,064,764 4,274,262 3,256,456 1,891,264
Occupancy...................... 252,391 261,073 510,357 412,531 304,231
Furniture and equipment........ 211,449 218,652 440,378 350,131 176,756
Data processing................ 196,408 203,120 435,433 335,079 170,990
Advertising.................... 126,000 109,000 196,763 157,973 110,431
Loan processing cost........... 37,389 37,238 74,855 63,582 153,835
Other expense.................. 866,090 786,994 1,583,659 1,312,203 756,916
----------- ----------- ----------- ----------- -----------
Total noninterest expenses... 4,335,246 3,680,841 7,515,707 5,887,955 3,564,423
----------- ----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE FEDERAL
INCOME TAX AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE...................... $ 2,419,180 $ 1,664,764 $ 4,097,567 $ 2,434,967 $(1,109,047)
Federal income tax expense....... 727,000 528,000 1,303,000 292,000 0
----------- ----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE...................... 1,692,180 1,136,764 2,794,567 2,142,967 (1,109,047)
Cumulative effect of change in
accounting principle (net of
taxes)......................... 0 0 0 (42,210) 0
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS)................ $ 1,692,180 $ 1,136,764 $ 2,794,567 $ 2,100,757 $(1,109,047)
=========== =========== =========== =========== ===========
Earnings (loss) per share before
cumulative effect of change in
accounting principle:
Basic........................ $ 0.58 $ 0.44 $ 1.08 $ 0.83 $ (0.55)
=========== =========== =========== =========== ===========
Diluted...................... $ 0.58 $ 0.44 $ 1.07 $ 0.82 $ (0.55)
=========== =========== =========== =========== ===========
Per share cumulative effect of
change in accounting
principle...................... $ 0.00 $ 0.00 $ 0.00 $ 0.02 $ 0.00
=========== =========== =========== =========== ===========
Earnings (loss) per share:
Basic........................ $ 0.58 $ 0.44 $ 1.08 $ 0.81 $ (0.55)
=========== =========== =========== =========== ===========
Diluted...................... $ 0.58 $ 0.44 $ 1.07 $ 0.80 $ (0.55)
=========== =========== =========== =========== ===========
Average shares outstanding....... 2,895,586 2,596,102 2,596,102 2,596,102 2,003,018
=========== =========== =========== =========== ===========
F-4
67
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
ACCUMULATED
RETAINED OTHER TOTAL
COMMON EARNINGS COMPREHENSIVE SHAREHOLDERS'
STOCK (DEFICIT) INCOME EQUITY
----------- ----------- ------------- -------------
BALANCE, JANUARY 1, 1998........ $13,880,972 $ (404,071) $ (3,631) $13,473,270
Common stock sale............... 14,300,826 14,300,826
Comprehensive income (loss):
Net loss...................... (1,109,047) (1,109,047)
Change in net unrealized gain
(loss) on securities
available for sale, net of
reclassification and tax
effect..................... 35,467 35,467
-----------
Total comprehensive income
(loss)................... (1,073,580)
----------- ----------- ---------- -----------
BALANCES, DECEMBER 31, 1998..... 28,181,798 (1,513,118) 31,836 26,700,516
Comprehensive income:
Net income.................... 2,100,757 2,100,757
Change in net unrealized gain
(loss) on securities
available for sale, net of
reclassification and tax
effect..................... (833,404) (833,404)
-----------
Total comprehensive
income................... 1,267,353
----------- ----------- ---------- -----------
BALANCES, DECEMBER 31, 1999..... 28,181,798 587,639 (801,568) 27,967,869
Payment of 5% stock dividend.... 1,753,603 (1,753,929) (326)
Comprehensive income:
Net income.................... 2,794,567 2,794,567
Change in net unrealized gain
(loss) on securities
available for sale, net of
reclassification and tax
effect..................... 1,091,776 1,091,776
-----------
Total comprehensive
income................... 3,886,343
----------- ----------- ---------- -----------
BALANCES, DECEMBER 31, 2000..... 29,935,401 1,628,277 290,208 31,853,886
Common stock sale............... 6,748,719 6,748,719
Comprehensive income:
Net income (unaudited)........ 1,692,180 1,692,180
Change in net unrealized gain
(loss) on securities
available for sale, net of
reclassification and tax
effect..................... 152,530 152,530
-----------
Total comprehensive
income................... 1,844,710
----------- ----------- ---------- -----------
BALANCES, JUNE 30, 2001......... $36,684,120 $ 3,320,457 $ 442,738 $40,447,315
=========== =========== ========== ===========
See accompanying notes to consolidated financial statements.
F-5
68
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
--------------------------- ---------------------------------------------
2001 2000 2000 1999 1998
------------ ------------ ------------- ------------- -------------
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)....................... $ 1,692,180 $ 1,136,764 $ 2,794,567 $ 2,100,757 $ (1,109,047)
Adjustments to reconcile net income
(loss) to net cash from operating
activities
Depreciation and amortization......... 201,424 296,083 590,087 538,996 274,364
Provision for loan losses............. 1,180,000 945,000 1,854,000 1,960,900 2,571,800
Gain on sale of loans................. 0 (40,197) (49,975) (13,047) 0
(Gain)/loss on sale of securities..... (99,594) 275,321 275,321 0 (128)
Net change in
Accrued interest receivable......... 14,460 (340,263) (915,180) (695,042) (1,095,021)
Other assets........................ (3,705,319) (353,451) (827,706) (2,869,730) (432,695)
Accrued expenses and other
liabilities....................... (625,219) 1,733,966 4,325,059 2,118,482 208,517
------------ ------------ ------------- ------------- -------------
Net cash from operating
activities...................... (1,342,068) 3,653,223 8,046,173 3,141,316 417,790
CASH FLOWS FROM INVESTING ACTIVITIES
Loan originations and payments, net..... (78,326,155) (66,977,283) (121,920,318) (123,354,358) (171,857,839)
Purchase of:
Securities available for sale......... (17,169,816) (11,881,639) (19,816,814) (17,765,304) (28,320,575)
Securities held to maturity........... (5,379,838) (4,763,302) (7,472,674) (7,056,858) 0
Federal Home Loan Bank stock.......... 0 0 0 (784,900) 0
Premises and equipment................ (2,344,810) (141,364) (1,098,833) (1,926,748) (1,082,815)
Proceeds from:
Sales of available for sale
securities.......................... 5,361,961 6,718,120 6,718,120 0 1,000,313
Maturities and repayments of available
for sale securities................. 10,337,140 1,761,543 3,497,789 6,526,816 6,203,087
Maturities and repayments of held to
maturity securities................. 101,500 0 0 0 0
------------ ------------ ------------- ------------- -------------
Net cash from investing
activities...................... (87,420,018) (75,283,925) (140,092,730) (144,361,352) (194,057,829)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits................ 94,481,733 66,783,871 130,911,341 122,830,953 162,309,755
Proceeds from the sale of trust
preferred securities.................. 0 0 0 16,000,000 0
Net proceeds from sale of common
stock................................. 6,748,719 0 0 0 14,300,826
Net increase in other borrowed money.... 55,117 20,236 42,755 13,755 0
Fractional shares purchased............. 0 0 (326) 0 0
Net increase in securities sold under
agreements to repurchase.............. 2,636,252 2,470,559 5,544,102 9,569,688 16,382,154
------------ ------------ ------------- ------------- -------------
Net cash from financing
activities...................... 103,921,821 69,274,666 136,497,872 148,414,396 192,992,735
------------ ------------ ------------- ------------- -------------
Net change in cash and cash equivalents... $ 15,159,735 $ (2,356,036) $ 4,451,315 $ 7,194,360 $ (647,304)
Cash and cash equivalents at beginning of
period.................................. 18,101,671 13,650,356 13,650,356 6,455,996 7,103,300
------------ ------------ ------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD.................................. $ 33,261,406 $ 11,294,320 $ 18,101,671 $ 13,650,356 $ 6,455,996
============ ============ ============= ============= =============
Supplemental disclosures of cash flow
information
Cash paid during the year for:
Interest.............................. $ 15,016,664 $ 9,000,105 $ 20,382,032 $ 11,796,860 $ 5,237,768
Federal income tax.................... 1,388,110 792,000 1,693,000 1,620,773 165,000
Cash received during the year for:
Termination of interest rate swap..... 0 275,000 275,000 0 0
See accompanying notes to consolidated financial statements.
F-6
69
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of Mercantile Bank Corporation and its wholly-owned subsidiaries,
Mercantile Bank of West Michigan, and its wholly-owned subsidiary, Mercantile
Bank Mortgage Company, and MBWM Capital Trust I, after elimination of
significant intercompany transactions and accounts.
NATURE OF OPERATIONS: Mercantile Bank Corporation ("Mercantile") was
incorporated on July 15, 1997 to establish and own Mercantile Bank of West
Michigan ("Bank") based in Grand Rapids, Michigan. The Bank is a community-based
financial institution. The Bank began operations on December 15, 1997, after
several months of work by incorporators and employees in preparing applications
with the various regulatory agencies and obtaining insurance and building space.
The Bank's primary deposit products are checking, savings, and term certificate
accounts, and its primary lending products are commercial, residential mortgage,
and installment loans. Substantially all loans are secured by specific items of
collateral including business assets, consumer assets and real estate.
Commercial loans are expected to be repaid from cash flow from operations of
businesses. Real estate loans are secured by both residential and commercial
real estate. The Bank's loan accounts are primarily with customers located in
western Michigan, within Kent County. The Bank's retail deposits are also to
customers located in western Michigan. As an alternative source of funds, the
Bank has also issued certificates to depositors outside of the Bank's primary
market area. Substantially all revenues are derived from banking products and
services.
Mercantile Capital Trust I ("Capital Trust") was formed in September 1999.
All of the common securities of this special purpose trust are owned by
Mercantile. The Trust exists solely to issue capital securities. For financial
reporting purposes, the Trust is reported as a subsidiary and is consolidated
into the financial statements of Mercantile. The capital securities are
presented as a separate line item on the consolidated balance sheet as
guaranteed preferred beneficial interests in Mercantile's subordinated
debentures.
During 2000, the Mercantile Bank Mortgage Company ("Mortgage Company"), a
wholly-owned subsidiary of the Bank, was established to increase the
profitability and efficiency of its mortgage loan operations. The Mortgage
Company initiated business on October 24, 2000 via the Bank's contribution of
most of its residential mortgage loan portfolio and participation interests in
certain commercial mortgage loans. On the same date the Bank also transferred
its residential mortgage origination function to the Mortgage Company. Mortgage
loans originated and held by the Mortgage Company are serviced by the Bank
pursuant to a servicing agreement.
Mercantile's election to become a financial holding company pursuant to
Title I of the Gramm-Leach-Bliley Act and implementing Federal Reserve Board
regulations was effective March 23, 2000. At the present time Mercantile has no
plans to engage in any of the expanded activities permitted under the new
regulations.
USE OF ESTIMATES: To prepare financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes
F-7
70
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
estimates and assumptions based on available information. These estimates and
assumptions affect the amounts reported in the financial statements and the
disclosures provided, and future results could differ. The allowance for loan
losses and the fair values of financial instruments are particularly subject to
change.
CASH FLOW REPORTING: Cash and cash equivalents include cash on hand,
demand deposits with other financial institutions, short-term investments
(securities with daily put provisions) and federal funds sold. Cash flows are
reported net for customer loan and deposit transactions, interest-bearing time
deposits with other financial institutions and short-term borrowings with
maturities of 90 days or less.
SECURITIES: Securities classified as held to maturity are carried at
amortized cost when management has the positive intent and ability to hold them
to maturity. Securities available for sale consist of those securities which
might be sold prior to maturity due to changes in interest rates, prepayment
risks, yield and availability of alternative investments, liquidity needs or
other factors. Securities classified as available for sale are reported at their
fair value and the related unrealized holding gain or loss is reported, net of
related income tax effects, as a separate component of shareholders' equity,
until realized. Other securities such as Federal Home Loan Bank stock are
carried at cost.
Premiums and discounts on securities are recognized in interest income
using the interest method over the estimated life of the security. Gains and
losses on the sale of securities available for sale are determined based upon
amortized cost of the specific security sold. Securities are written down to
fair value when a decline in fair value is not temporary.
LOANS: Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at the principal
balance outstanding, net of deferred loan fees and costs and an allowance for
loan losses. Interest income is reported on the interest method and includes
amortization of net deferred loan fees and costs over the loan term. Interest
income is not reported when full loan repayment is in doubt, typically when the
loan is impaired or payments are past due over 90 days. Payments received on
such loans are reported as principal reductions.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is a valuation
allowance for probable incurred credit losses, increased by the provision for
loan losses and recoveries, and decreased by charge-offs. Management estimates
the allowance balance required based on past loan loss experience, the nature
and volume of the portfolio, information about specific borrower situations and
estimated collateral values, and economic conditions. Allocations of the
allowance may be made for specific loans, but the entire allowance is available
for any loan that, in management's judgment, should be charged-off. Loan losses
are charged against the allowance when management believes the uncollectibility
of a loan balance is confirmed.
A loan is impaired when full payment under the loan terms is not expected.
Impairment is evaluated in aggregate for smaller-balance loans of similar nature
such as residential mortgage, consumer and credit card loans, and on an
individual loan basis for other loans. If a loan is impaired, a portion of the
allowance is allocated so that the loan is reported, net, at the present value
of estimated future cash flows using the loan's existing
F-8
71
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
rate or at the fair value of collateral if repayment is expected solely from the
collateral. Loans are evaluated for impairment when payments are delayed,
typically 90 days or more, or when the internal grading system indicates a
doubtful classification.
PREMISES AND EQUIPMENT: Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed using both straight-line and
accelerated methods over the estimated useful lives of the respective assets.
Maintenance, repairs and minor alterations are charged to current operations as
expenditures occur and major improvements are capitalized. These assets are
reviewed for impairment under SFAS No. 121 when events indicate the carrying
amount may not be recoverable.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE: In 1998, the
Accounting Standards Executive Committee (AcSEC) of the American Institute of
Certified Public Accountants promulgated Statement of Position (SOP) 98-5. This
SOP provides guidance on the financial reporting of start-up costs and
organization costs. It requires cost of start-up activities and organization
costs to be expensed as incurred. Initial application of this SOP should be
reported as a cumulative effect of a change in accounting principle. Mercantile
elected to adopt the provisions of SOP 98-5 on January 1, 1999. Included in the
December 31, 1999 Consolidated Statement of Income is a charge to operations of
$42,210 reported as a cumulative effect of change in accounting principle.
LONG-TERM ASSETS: Premises and equipment and other long-term assets are
reviewed for impairment when events indicate their carrying amount may not be
recoverable from future undiscounted cash flows. If impaired, the assets are
recorded at discounted amounts. Issuance costs of trust preferred securities are
amortized over the term of the securities.
REPURCHASE AGREEMENTS: Substantially all repurchase agreement liabilities
represent amounts advanced by various customers. Securities are pledged to cover
these liabilities, which are not covered by federal deposit insurance.
STOCK OPTIONS: No expense for stock options is recorded, as the grant
price equals the market price of the stock at grant date. Pro-forma disclosures
show the effect on income and earnings per share had the options' fair value
been recorded using an option pricing model. The pro-forma effect is expected to
increase in the future as more options are granted.
INCOME TAXES: Income tax expense is the sum of the current year income tax
due or refundable and the change in deferred tax assets and liabilities.
Deferred tax assets and liabilities are the expected future tax consequences of
temporary differences between the carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized.
FINANCIAL INSTRUMENTS: Financial instruments include off-balance-sheet
credit instruments, such as commitments to make loans and standby letters of
credit, issued to meet customer financing needs. The face amount for these items
represents the exposure to loss, before considering customer collateral or
ability to repay. Such financial instruments are recorded when they are funded.
F-9
72
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INTEREST RATE HEDGE AGREEMENTS: Mercantile may enter into interest rate
hedge agreements which involve the exchange of fixed and floating rate interest
payments over the life of the agreement without the exchange of the underlying
principal amounts. The differential to be paid or received is accrued as
interest rates change and is recognized over the life of the agreements as an
adjustment to interest income.
FAIR VALUES OF FINANCIAL INSTRUMENTS: Fair values of financial instruments
are estimated using relevant market information and other assumptions, as more
fully disclosed separately. Fair value estimates involve uncertainties and
matters of significant judgment regarding interest rates, credit risk,
prepayments and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates. The fair value estimates of existing on-and
off-balance sheet financial instruments does not include the value of
anticipated future business or the values of assets and liabilities not
considered financial instruments.
EARNINGS (LOSS) PER SHARE: Basic earnings (loss) per share is based on
weighted average common shares outstanding during the period. Diluted earnings
(loss) per share includes the dilutive effect of additional potential common
shares issuable under stock options. Earnings (loss) per share are restated for
all stock dividends, including the 5% stock dividend paid on February 1, 2001.
COMPREHENSIVE INCOME: Comprehensive income consists of net income and
other comprehensive income. Other comprehensive income includes unrealized gains
and losses on securities available for sale which are also recognized as
separate components of equity.
NEW ACCOUNTING PRONOUNCEMENTS: Beginning January 1, 2001, a new accounting
standard requires all derivatives to be recorded at fair value. Unless
designated as hedges, changes in these fair values will be recorded in the
income statement. Fair value changes involving hedges will generally be recorded
by offsetting gains and losses on the hedge and on the hedged item, even if the
fair value of the hedged item is not otherwise recorded. Adoption of this
standard on January 1, 2001 did not have a material effect on the Bank's
condition or results of operations.
RECLASSIFICATIONS: Some items in the prior year financial statements were
reclassified to conform to the current presentation.
F-10
73
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- INVESTMENT SECURITIES
The amortized cost and fair values of investment securities at the end of
the period were as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUES
----------- ---------- ----------- -----------
AVAILABLE FOR SALE
June 30, 2001
U.S. Government agency debt
obligations............... $ 2,964,547 $ 5,940 $ (4,547) $ 2,965,940
Mortgage-backed securities... 42,404,977 734,454 (81,194) 43,058,237
Municipal revenue bonds...... 1,000,000 16,085 0 1,016,085
----------- -------- ----------- -----------
$46,369,524 $756,479 $ (85,741) $47,040,262
=========== ======== =========== ===========
December 31, 2000
U.S. Government agency debt
obligations............... $ 9,800,282 $137,309 $ (60,271) $ 9,877,320
Mortgage-backed securities... 33,907,502 475,643 (117,287) 34,265,858
Municipal revenue bonds...... 1,000,000 4,315 0 1,004,315
----------- -------- ----------- -----------
$44,707,784 $617,267 $ (177,558) $45,147,493
=========== ======== =========== ===========
December 31, 1999
U.S. Government agency debt
obligations............... $14,071,776 $ 0 $ (408,337) $13,663,439
Mortgage-backed securities... 20,258,091 0 (796,283) 19,461,808
Municipal revenue bonds...... 1,000,000 0 (9,944) 990,056
----------- -------- ----------- -----------
$35,329,867 $ 0 $(1,214,564) $34,115,303
=========== ======== =========== ===========
December 31, 1998
U.S. Treasury securities..... $ 4,506,774 $ 16,376 $ 0 $ 4,523,120
U.S. Government agency debt
obligations............... 12,015,020 45,207 (29,437) 12,030,790
Mortgage-backed securities... 7,590,648 21,104 (5,415) 7,606,337
----------- -------- ----------- -----------
$24,112,412 $ 82,687 $ (34,852) $24,160,247
=========== ======== =========== ===========
HELD TO MATURITY
June 30, 2001
Municipal general obligation
bonds..................... $16,946,580 $584,394 $ (28,512) $17,502,462
Municipal revenue bonds...... 2,853,354 46,887 (4,257) 2,895,984
----------- -------- ----------- -----------
$19,799,934 $631,281 $ (32,769) $20,398,446
=========== ======== =========== ===========
December 31, 2000
Municipal general obligation
bonds..................... $13,065,553 $394,004 $ (926) $13,458,631
Municipal revenue bonds...... 1,458,788 30,463 (5,571) 1,483,680
----------- -------- ----------- -----------
$14,524,341 $424,467 $ (6,497) $14,942,311
=========== ======== =========== ===========
December 31, 1999
Municipal general obligation
bonds..................... $ 6,433,594 $ 0 $ (51,132) $ 6,382,462
Municipal revenue bonds...... 622,898 0 (23,031) 599,867
----------- -------- ----------- -----------
$ 7,056,492 $ 0 $ (74,163) $ 6,982,329
=========== ======== =========== ===========
F-11
74
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The amortized cost and fair values of debt investment securities at June
30, 2001 (unaudited) and December 31, 2000, by contractual maturity, are shown
below. The contractual maturity is utilized below for U.S. Government agency
debt obligations and municipal bonds. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties. Securities not due at
a single maturity date, mortgage backed securities, are shown separately.
HELD-TO-MATURITY AVAILABLE-FOR-SALE
------------------------------------ ------------------------------------
WEIGHTED WEIGHTED
AVERAGE AMORTIZED FAIR AVERAGE AMORTIZED FAIR
YIELD COST VALUE YIELD COST VALUE
-------- ----------- ----------- -------- ----------- -----------
June 30, 2001 (Unaudited)
Due in one year or less... NA $ 0 $ 0 6.35% $ 500,000 $ 503,565
Due from one to five
years................... 6.62% 3,346,380 3,462,939 7.00 1,500,000 1,518,460
Due from five to ten
years................... 6.96 5,157,926 5,401,026 6.23 993,818 992,970
Due after ten years....... 7.23 11,295,628 11,534,481 6.55 970,729 967,030
Mortgage-backed........... NA 0 0 6.77 42,404,977 43,058,237
----------- ----------- ----------- -----------
$19,799,934 $20,398,446 6.76 $46,369,524 $47,040,262
=========== =========== =========== ===========
December 31, 2000
Due in one year or less... 5.38% $ 102,257 $ 102,210 6.35% $ 500,000 $ 501,395
Due from one to five
years................... 6.66 2,459,284 2,494,428 6.12 5,500,813 5,471,660
Due from five to ten
years................... 6.87 5,470,924 5,626,116 7.35 3,899,383 3,946,710
Due after ten years....... 7.67 6,491,876 6,719,557 7.74 900,086 961,870
Mortgage-backed........... NA 0 0 6.98 33,907,502 34,265,858
----------- ----------- ----------- -----------
7.19 $14,524,341 $14,942,311 6.92 $44,707,784 $45,147,493
=========== =========== =========== ===========
During 2001 (unaudited), investment securities with an aggregated amortized
cost of $5,262,368 were sold, resulting in an aggregate realized net gain of
$99,594.
During 2000, investment securities with an aggregated amortized cost basis
of $6,993,441 were sold, resulting in an aggregate realized loss of $275,321.
There were no sales of investment securities during 1999. The sale of an
investment security during 1998 resulted in a realized gain of $128.
The carrying value of investment securities that are pledged to secure
securities sold under agreements to repurchase and other deposits was
$39,347,116, $40,015,759 and $28,733,258 at June 30, 2001 (unaudited), December
31, 2000 and 1999, respectively.
F-12
75
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans were as follows:
JUNE 30, 2001 DECEMBER 31, 2000 DECEMBER 31, 1999 DECEMBER 31, 1998
-------------------- -------------------- -------------------- --------------------
BALANCE % BALANCE % BALANCE % BALANCE %
------------ ----- ------------ ----- ------------ ----- ------------ -----
(UNAUDITED)
Real Estate:
Construction and land
development..................... $ 42,934,475 8.5% $ 38,815,436 9.0% $ 37,224,847 12.1% $ 13,656,284 7.4%
Secured by 1-4 family
properties...................... 35,097,998 6.9 33,708,709 7.8 22,535,386 7.3 10,655,703 5.8
Secured by multi-family
properties...................... 2,016,892 0.4 2,127,047 0.5 2,326,684 0.8 2,520,747 1.4
Secured by nonfarm nonresidential
properties...................... 239,372,860 47.1 197,018,062 45.9 157,686,466 51.2 100,742,487 54.5
Commercial.......................... 181,473,660 35.7 151,344,028 35.2 83,908,726 27.2 55,071,347 29.8
Consumer............................ 7,214,662 1.4 6,790,823 1.6 4,324,367 1.4 2,098,034 1.1
------------ ----- ------------ ----- ------------ ----- ------------ -----
$508,110,547 100.0% $429,804,105 100.0% $308,006,476 100.0% $184,744,602 100.0%
============ ===== ============ ===== ============ ===== ============ =====
DECEMBER 31, 1997
-------------------
BALANCE %
----------- -----
Real Estate:
Construction and land
development..................... $ 0 0.0%
Secured by 1-4 family
properties...................... 171,872 1.3
Secured by multi-family
properties...................... 0 0.0
Secured by nonfarm nonresidential
properties...................... 5,421,302 42.1
Commercial.......................... 7,278,664 56.5
Consumer............................ 14,925 0.1
----------- -----
$12,886,763 100.0%
=========== =====
Activity in the allowance for loan losses is as follows:
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
-------------------------- --------------------------------------------------
2001 2000 2000 1999 1998 1997
----------- ----------- ---------- ---------- ---------- --------
(UNAUDITED) (UNAUDITED)
Beginning balance................... $6,301,805 $4,620,469 $4,620,469 $2,765,100 $ 193,300 $ 0
Provision charged to operating
expense........................... 1,180,000 945,000 1,854,000 1,960,900 2,571,800 193,300
Charge-offs......................... (64,831) (46,384) (185,876) (108,531) 0 0
Recoveries.......................... 45,118 8,400 13,212 3,000 0 0
---------- ---------- ---------- ---------- ---------- --------
Ending balance.................. $7,462,092 $5,527,485 $6,301,805 $4,620,469 $2,765,100 $193,300
========== ========== ========== ========== ========== ========
Impaired loans were as follows:
2001 2000 1999
----------- ------- -------
(UNAUDITED)
Period end loans with no allocated allowance for loan
losses.................................................... $ 0 $ 0 $ 0
Period end loans with allocated allowance for loan losses... 174,447 94,892 0
-------- ------- -------
$174,447 $94,892 $ 0
======== ======= =======
Amount of the allowance for loan losses allocated........... $ 31,933 $20,000 $ 0
Average of impaired loans during the period................. 134,670 138,518 24,347
F-13
76
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Bank did not recognize any interest income on impaired loans during
2001 (unaudited), 2000, 1999 or 1998.
Concentrations within the loan portfolio were as follows:
DECEMBER 31,
---------------------------------------------------
JUNE 30, 2001 2000 1999
------------------------ ------------------------ ------------------------
PERCENTAGE PERCENTAGE PERCENTAGE
OF OF OF
LOAN LOAN LOAN
BALANCE PORTFOLIO BALANCE PORTFOLIO BALANCE PORTFOLIO
----------- ---------- ----------- ---------- ----------- ----------
(UNAUDITED)
Commercial real
estate loans to
operators of non-
residential
buildings.......... $70,718,521 13.9% $62,089,376 14.4% $41,039,899 13.3%
NOTE 4 -- PREMISES AND EQUIPMENT -- NET
Premises and equipment are as follows:
DECEMBER 31,
------------------------
JUNE 30, 2001 2000 1999
------------- ---------- ----------
(UNAUDITED)
Land and improvements................... $1,134,860 $1,134,548 $ 443,408
Buildings and leasehold improvements.... 2,137,815 2,128,353 2,111,049
Construction in process................. 2,108,240 220,797 0
Furniture and equipment................. 2,034,214 1,586,621 1,417,086
---------- ---------- ----------
7,415,129 5,070,319 3,971,543
Less: accumulated depreciation.......... 1,166,886 950,934 510,356
---------- ---------- ----------
$6,248,243 $4,119,385 $3,461,187
========== ========== ==========
F-14
77
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- DEPOSITS
Deposits at period end are summarized as follows:
DECEMBER 31,
------------------------------------------------------------------
JUNE 30, 2001 2000 1999 1998
-------------------- -------------------- -------------------- --------------------
BALANCE % BALANCE % BALANCE % BALANCE %
------------ ----- ------------ ----- ------------ ----- ------------ -----
(UNAUDITED)
Noninterest-bearing
demand............. $ 38,381,197 7.4% $ 27,368,257 6.4% $ 19,513,231 6.6% $ 14,319,290 8.3%
Interest-bearing
checking........... 14,787,820 2.8 12,968,028 3.1 11,040,426 3.7 7,765,703 4.5
Money market......... 5,285,290 1.0 5,196,217 1.2 5,604,816 1.9 3,822,019 2.2
Savings.............. 40,621,340 7.8 36,331,140 8.6 39,737,096 13.5 28,796,603 16.8
Time, under
$100,000........... 6,684,212 1.3 6,164,803 1.4 4,873,222 1.7 3,305,504 1.9
Time, $100,000 and
over............... 46,673,333 9.0 38,681,764 9.1 22,573,206 7.7 16,718,705 9.7
------------ ----- ------------ ----- ------------ ----- ------------ -----
152,433,192 29.3 126,710,209 29.8 103,341,997 35.1 74,727,824 43.4
Out-of-area time,
under $100,000..... 73,799,485 14.2 55,260,216 13.0 71,997,053 24.4 77,847,412 45.3
Out-of-area time,
$100,000 and over.. 293,989,369 56.5 243,769,888 57.2 119,489,922 40.5 19,422,783 11.3
------------ ----- ------------ ----- ------------ ----- ------------ -----
367,788,854 70.7 299,030,104 70.2 191,486,975 64.9 97,270,195 56.6
------------ ----- ------------ ----- ------------ ----- ------------ -----
$520,222,046 100.0% $425,740,313 100.0% $294,828,972 100.0% $171,998,019 100.0%
============ ===== ============ ===== ============ ===== ============ =====
Out-of-area certificates of deposit consist of certificates obtained from
depositors outside of the primary market area. As of June 30, 2001 (unaudited),
out-of-area certificates of deposit totaling $356,379,589, were obtained through
brokers, with the remaining $11,409,256 obtained directly from the depositors.
As of December 31, 2000, out-of-area certificates of deposit totaling
$288,389,984 were obtained through deposit brokers, with the remaining
$10,640,120 obtained directly from the depositors.
The following table depicts the maturity distribution for certificates of
deposit.
DECEMBER 31,
----------------------------
JUNE 30, 2001 2000 1999
------------- ------------ ------------
(UNAUDITED)
In one year........................... $330,456,548 $291,073,673 $203,685,797
In two years.......................... 62,740,303 49,585,317 13,534,313
In three years........................ 26,271,066 3,195,678 623,293
In four years......................... 1,678,482 22,003 1,090,000
In five years......................... 0 0 0
------------ ------------ ------------
$421,146,399 $343,876,671 $218,933,403
============ ============ ============
F-15
78
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table depicts the maturity distribution for certificates of
deposit with balances of $100,000 or more.
DECEMBER 31,
----------------------------
JUNE 30, 2001 2000 1999
------------- ------------ ------------
(UNAUDITED)
Up to three months.................... $ 98,415,769 $ 64,938,960 $ 48,761,878
Three months to six months............ 79,743,615 65,612,880 53,506,644
Six months to twelve months........... 88,093,658 107,354,179 32,250,070
Over twelve months.................... 74,409,660 44,545,633 7,544,536
------------ ------------ ------------
$340,662,702 $282,451,652 $142,063,128
============ ============ ============
NOTE 6 -- SHORT-TERM BORROWINGS
Information relating to short-term borrowings, comprised entirely of
securities sold under agreements to repurchase, is summarized below:
DECEMBER 31,
---------------------------------------
JUNE 30, 2001 2000 1999 1998
------------- ----------- ----------- -----------
(UNAUDITED)
Outstanding balance at
year-end................ $34,787,643 $32,151,391 $26,607,289 $17,037,601
Average interest rate at
year-end................ 3.49% 4.63% 4.22% 4.20%
Average balance during the
year.................... 31,691,277 29,190,780 20,229,314 10,305,728
Average interest rate
during the year......... 4.08% 4.66% 4.13% 4.72%
Maximum month end balance
during the year......... 34,787,643 35,473,498 26,607,289 18,498,833
Securities sold under agreements to repurchase (repurchase agreements)
generally have original maturities of less than one year. Repurchase agreements
are treated as financings and the obligations to repurchase securities sold are
reflected as liabilities. Securities involved with the repurchase agreements are
recorded as assets of the Bank and are primarily held in safekeeping by
correspondent banks. Repurchase agreements are offered principally to certain
large deposit customers as uninsured deposit equivalent investments.
F-16
79
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 -- FEDERAL INCOME TAXES
The consolidated provision for income taxes is as follows:
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
-------------------------- ---------------------------------------
2001 2000 2000 1999 1998
----------- ----------- ---------- ---------- -----------
(UNAUDITED) (UNAUDITED)
Current.............. $1,118,573 $ 838,796 $1,913,297 $1,820,858 $ 399,852
Deferred benefit..... (391,573) (310,796) (610,297) (636,480) (1,147,247)
Change in valuation
allowance.......... 0 0 0 (892,378) 747,395
---------- --------- ---------- ---------- -----------
Tax expense........ $ 727,000 $ 528,000 $1,303,000 $ 292,000 $ 0
========== ========= ========== ========== ===========
The recorded consolidated income tax provision in both 2000 and 1999
differs from that computed by multiplying pre-tax income by the statutory
federal income tax rates as follows:
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
-------------------------- ------------------------------------
2001 2000 2000 1999 1998
----------- ----------- ---------- --------- ---------
(UNAUDITED) (UNAUDITED)
Statutory rates....... $ 822,521 $566,020 $1,393,173 $ 827,889 $(377,076)
Increase (decrease)
from
Tax-exempt
interest......... (110,473) (45,058) (110,102) (14,972) 0
Valuation
allowance........ 0 0 0 (526,565) 365,813
Nondeductible
expenses......... 14,952 7,038 19,929 5,648 11,263
--------- -------- ---------- --------- ---------
Tax expense...... $ 727,000 $528,000 $1,303,000 $ 292,000 $ 0
========= ======== ========== ========= =========
F-17
80
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The net deferred tax asset recorded includes the following amounts of
deferred tax assets and liabilities as of June 30, 2001 (unaudited), December
31, 2000 and 1999:
DECEMBER 31,
JUNE 30, ------------------------
2001 2000 1999
----------- ---------- ----------
(UNAUDITED)
Deferred tax assets
Provision for loan losses................. $2,423,526 $2,023,051 $1,392,691
Start-up/pre-opening expenses............. 46,103 59,537 73,973
Deferred loan fees........................ 90,850 91,507 92,822
Unrealized loss on securities available
for sale............................... 0 0 412,953
Deferred compensation..................... 38,638 19,213 4,677
Miscellaneous accruals.................... 0 0 5,500
---------- ---------- ----------
2,599,117 2,193,308 1,982,616
Deferred tax liabilities
Unrealized gain on securities available
for sale............................... 228,077 154,000 0
Accretion................................. 10,638 7,978 2,659
Depreciation.............................. 41,351 29,775 21,746
---------- ---------- ----------
280,066 191,753 24,405
---------- ---------- ----------
Net deferred tax asset...................... $2,319,051 $2,001,555 $1,958,211
========== ========== ==========
A valuation allowance related to deferred tax assets is required when it is
considered more likely than not that all or part of the benefits related to such
assets will not be realized. Management has determined that no valuation
allowance was required for 2001 (unaudited), 2000 or at year-end 1999.
NOTE 8 -- STOCK OPTION PLAN
Stock option plans are used to reward employees and provide them with
additional equity interest. Stock options are granted at the market price on the
date of grant. The stock options fully vest after one year and expire ten years
from the date of grant. At
F-18
81
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
June 30, 2001 (unaudited) and December 31, 2000, there were 95,970 shares
authorized for future grants.
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
------------------------- ---------------------------------
2001 2000 2000 1999 1998
----------- ----------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)
Stock options outstanding
Beginning.................. 166,526 127,836 127,836 127,836 81,636
Granted.................... 0 8,660 38,690 0 46,200
--------- --------- --------- --------- ---------
Ending.................. 166,526 136,496 166,526 127,836 127,836
========= ========= ========= ========= =========
Options exercisable at
period end.............. 120,486 83,736 114,186 80,236 52,674
--------- --------- --------- --------- ---------
Minimum exercise price..... $ 9.52 $ 9.52 $ 9.52 $ 9.52 $ 9.52
Maximum exercise price..... 12.98 12.98 12.98 12.98 12.98
Average exercise price..... 11.01 11.01 11.01 10.95 10.95
Average remaining option
term.................... 7.2 Years 7.2 Years 7.6 Years 8.0 Years 9.0 Years
Estimated fair value of stock
options granted:........... $ 36,805 $ 155,003 $ 172,510
Assumptions used:
Risk-free interest
rate.................. 6.58% 5.99% 4.56%
Expected option life.... 10 Years 10 Years 7 Years
Expected stock
volatility............ 37% 37% 11%
Expected dividends...... 0% 0% 0%
SFAS No. 123, Accounting for Stock Based Compensation, requires proforma
disclosures for companies that do not adopt its fair value accounting method for
stock-based employee compensation. The following proforma information presents
net income and basic and diluted earnings per share had the fair value been used
to measure compensation cost for stock option plans. The exercise price of
options granted is
F-19
82
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
equivalent to the market value of underlying stock at the grant date. No
compensation cost was actually recognized for stock options.
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
------------------------- ---------------------------------------
2001 2000 2000 1999 1998
----------- ----------- ---------- ---------- -----------
(UNAUDITED) (UNAUDITED)
Pro-forma income
(loss), assuming SFAS
123 fair value method
was used for stock
options:
Income (loss) before
cumulative effect
of change in
accounting
principle......... $1,692,180 $1,136,764 $2,741,602 $2,065,991 $(1,299,991)
Basic income (loss)
per share before
cumulative effect
of change in
accounting
principle......... 0.58 0.44 1.06 0.80 (0.65)
Diluted income (loss)
per share before
cumulative effect
of change in
accounting
principle......... 0.58 0.44 1.05 0.79 (0.65)
Pro-forma net income
(loss)............ $1,622,170 $1,116,424 $2,741,602 $2,023,781 $(1,299,991)
Pro-forma basic
income (loss) per
share............. 0.56 0.43 1.06 0.78 (0.65)
Pro-forma diluted
income (loss) per
share............. 0.55 0.43 1.05 0.77 (0.65)
NOTE 9 -- RELATED PARTIES
Certain directors and executive officers of the Bank, including their
immediate families and companies in which they are principal owners, were loan
customers of the Bank. At year-end 2000 and 1999, the Bank had approximately
$7,099,000 and $9,046,000 in loan commitments to directors and executive
officers, of which approximately $3,914,000 and $5,063,000 were outstanding
December 31, 2000 and 1999, respectively. At June 30,
F-20
83
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2001 (unaudited), the Bank had approximately $7,170,000 in loan commitments to
directors and executive officers, of which approximately $3,141,000 were
outstanding.
DECEMBER 31,
JUNE 30, --------------------------
2001 2000 1999
----------- ----------- -----------
(UNAUDITED)
Beginning balance........................ $ 3,914,000 $ 5,063,000 $ 9,095,000
New loans................................ 427,000 2,035,000 876,000
Repayments............................... (1,132,000) (3,184,000) (4,908,000)
----------- ----------- -----------
Ending balance...................... $ 3,209,000 $ 3,914,000 $ 5,063,000
=========== =========== ===========
Related party deposits and repurchase agreements totaled approximately
$14,808,000 at June 30, 2001 (unaudited), $13,173,000 at December 31, 2000 and
$14,800,000 at December 31, 1999.
NOTE 10 -- COMMITMENTS AND OFF-BALANCE-SHEET RISK
The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Loan commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition established in the
contract. Standby letters of credit are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
These instruments involve, to varying degrees, elements of credit risk in
excess of the amount recognized, if any, in the balance sheet. The Bank's
maximum exposure to loan loss in the event of nonperformance by the other party
to the financial instrument for commitments to extend credit and standby letters
of credit is represented by the contractual notional amount of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments. Collateral,
such as accounts receivable, securities, inventory, property and equipment, is
generally obtained based on management's credit assessment of the borrower.
Fair value of the Bank's off-balance sheet instruments (commitments to
extend credit and standby letters of credit) is based on rates currently charged
to enter into similar agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standing. At December 31, 2000 and
1999, the rates on existing off-balance sheet instruments were substantially
equivalent to current market rates, considering the underlying credit standing
of the counterparties.
F-21
84
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Bank's maximum exposure to credit losses for loan commitments and
standby letters of credit outstanding was as follows:
DECEMBER 31,
JUNE 30, ----------------------------
2001 2000 1999
------------ ------------ ------------
(UNAUDITED)
Commercial unused lines of credit..... $100,710,929 $ 87,121,094 $ 87,488,616
Unused lines of credit secured by 1-4
family residential properties....... 8,373,692 7,641,057 6,112,897
Credit card unused lines of credit.... 5,534,949 4,578,325 3,419,628
Other consumer unused lines of
credit.............................. 2,523,366 2,062,084 3,126,906
Commitments to make loans............. 13,948,400 20,110,500 26,395,600
Standby letters of credit............. 38,274,236 36,889,288 28,963,217
------------ ------------ ------------
$169,365,572 $158,402,348 $155,506,864
============ ============ ============
Mercantile was required to have $839,000, $689,000 and $564,000 of cash on
hand or on deposit with the Federal Reserve Bank of Chicago to meet regulatory
reserve and clearing requirements at June 30, 2001 (unaudited), and December 31,
2000 and 1999. These balances do not earn interest.
The Bank leases the main office facility under an operating lease
agreement. Total rental expense for the lease for the six months ended June 30,
2001 and 2000 (unaudited) were $81,873 and $79,488. Total rental expense for the
lease for 2000, 1999 and 1998 was $160,566, $155,889 and $151,349, respectively.
Future minimum rentals under this lease as of June 30, 2001 (unaudited) and
December 31, 2000 are as follows:
JUNE 30, DECEMBER 31,
2001 2000
----------- ------------
(UNAUDITED)
2001.................................................. $ 81,870 $ 163,740
2002.................................................. 163,700 163,740
2003.................................................. 163,700 163,740
2004.................................................. 163,700 163,740
2005.................................................. 163,700 163,740
Thereafter............................................ 191,027 272,900
-------- ----------
$927,697 $1,091,600
======== ==========
NOTE 11 -- BENEFIT PLANS
Mercantile established a 401(k) benefit plan effective January 1, 1998,
covering substantially all of its employees. Mercantile's 2001 (unaudited),
2000, 1999 and 1998 matching 401(k) contribution charged to expense was $79,805,
$135,613, $85,080 and
F-22
85
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$59,705, respectively. The percent of Mercantile's matching contributions to the
401(k) is determined annually by the Board of Directors. During 1999, the 401(k)
benefit plan allowed employee contributions up to 15% of their compensation,
which are matched at 100% of the first 4% of the compensation contributed.
Matching contributions are immediately vested. The Plan was amended, effective
January 1, 2000, to increase the employer match from 4% of compensation
contributed to 5%.
Mercantile established a deferred compensation plan effective May 1, 1999,
in which all persons serving on the Board of Directors during the time the plan
is in effect are eligible to participate. Participants may elect to defer annual
director fees, with distributions to be paid only upon termination of service as
a director. Expense for the plan during 2001 (unaudited), 2000 and 1999 was
$2,455, $2,085 and $625, respectively.
NOTE 12 -- FAIR VALUES OF FINANCIAL INSTRUMENTS
Carrying amount and estimated fair values of financial instruments were as
follows.
DECEMBER 31,
JUNE 30, ---------------------------------------------------------
2001 2000 1999
--------------------------- --------------------------- ---------------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
VALUES VALUES VALUES VALUES VALUES VALUES
------------ ------------ ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
Financial assets
Cash and cash
equivalents........ $ 33,261,406 $ 33,261,406 $ 18,101,671 $ 18,101,671 $ 13,650,356 $ 13,650,356
Securities available
for sale........... 47,040,262 47,040,262 45,147,493 45,147,493 34,115,303 34,115,303
Securities held to
maturity........... 19,799,934 20,398,446 14,524,341 14,942,311 7,056,492 6,982,329
Federal Home Loan
Bank stock......... 784,900 784,900 784,900 784,900 784,900 784,900
Loans, net........... 500,648,455 526,904,000 423,502,300 424,690,000 303,386,007 294,581,000
Accrued interest
receivable......... 2,743,594 2,743,594 2,758,054 2,758,054 1,842,874 1,842,874
Financial liabilities
Deposits............. 520,222,046 523,455,000 425,740,313 424,359,000 294,828,972 295,078,734
Securities sold under
agreements to
repurchase......... 34,787,643 34,787,643 32,151,391 32,151,391 26,607,289 26,607,289
Accrued interest
payable............ 6,319,043 6,319,043 6,134,491 6,134,491 1,956,247 1,956,257
Guaranteed preferred
beneficial
interests in the
Corporation's
subordinated
debentures......... 16,000,000 12,968,584 16,000,000 11,527,593 16,000,000 11,402,303
Carrying amount is the estimated fair value for cash and cash equivalents,
Federal Home Loan Bank stock, accrued interest receivable and payable, demand
deposits,
F-23
86
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
securities sold under agreements to repurchase, and variable rate loans or
deposits that reprice frequently and fully. Security fair values are based on
market prices or dealer quotes, and if no such information is available, on the
rate and term of the security and information about the issuer. For fixed rate
loans or deposits and for variable rate loans or deposits with infrequent
repricing or repricing limits, fair value is based on discounted cash flows
using current market rates applied to the estimated life and credit risk. Fair
value of guaranteed preferred beneficial interests in the Corporation's
subordinated debentures is based on current rates for similar financing.
NOTE 13 -- EARNINGS PER SHARE
The factors used in the earnings per share computation follow.
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
-------------------------- ---------------------------------------
2001 2000 2000 1999 1998
----------- ----------- ---------- ---------- -----------
(UNAUDITED) (UNAUDITED)
Basic
Net income (loss)........... $1,692,180 $1,136,764 $2,794,567 $2,100,757 $(1,109,047)
========== ========== ========== ========== ===========
Weighted average common
shares outstanding........ 2,895,586 2,596,102 2,596,102 2,596,102 2,003,041
---------- ---------- ---------- ---------- -----------
Basic earnings (loss) per
common share.............. $ 0.58 $ 0.44 $ 1.08 $ 0.81 $ (0.55)
========== ========== ========== ========== ===========
Diluted
Net income (loss)........... $1,692,180 $1,136,764 $2,794,567 $2,100,757 $(1,109,047)
========== ========== ========== ========== ===========
Weighted average common
shares outstanding for
basic earnings per common
share..................... 2,895,586 2,596,102 2,596,102 2,596,102 2,003,018
Add: Dilutive effects of
assumed exercises of stock
options................... 48,759 5,751 7,229 27,627 0
---------- ---------- ---------- ---------- -----------
Average shares and dilutive
potential common shares... 2,944,345 2,601,853 2,603,331 2,623,729 2,003,018
========== ========== ========== ========== ===========
Diluted earnings (loss) per
common share................ $ 0.58 $ 0.44 $ 1.07 $ 0.80 $ (0.55)
========== ========== ========== ========== ===========
Stock options for 127,838 shares of common stock were not considered in
computing diluted earnings per common share for 1998 because they were
antidilutive.
NOTE 14 -- SALE OF TRUST PREFERRED SECURITIES
MBWM Capital Trust I, a business subsidiary of Mercantile, sold 1.6 million
Cumulative Preferred Securities ("trust preferred securities") at $10.00 per
trust preferred security in a September 1999 offering. The proceeds from the
sale of the trust preferred securities were used by MBWM Capital Trust I to
purchase an equivalent amount of subordinated debentures from Mercantile. The
trust preferred securities carry a fixed rate
F-24
87
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of 9.60%, have a stated maturity of 30 years, and, in effect, are guaranteed by
Mercantile. The securities are redeemable at par after 5 years. Distributions on
the trust preferred securities are payable quarterly on January 15, April 15,
July 15 and October 15. The first distribution was paid on October 15, 1999.
Under certain circumstances, distributions may be deferred for up to 20 calendar
quarters. However, during any such deferrals, interest accrues on any unpaid
distributions at the rate of 9.60% per annum.
NOTE 15 -- SALE OF COMMON STOCK
During the first quarter of 2001 Mercantile sold a combined 516,600 shares
of common stock in two private placement offerings, raising $6.7 million in net
proceeds. Mercantile contributed substantially all of the net proceeds to the
Bank as capital. During 1998, Mercantile completed a secondary stock offering,
selling 1,026,375 shares, as adjusted for the 5% stock dividend paid on February
1, 2001. Net of issuance expenses the common stock sale raised $14.3 million.
Substantially all of the net proceeds were contributed to the Bank, which were
used to support the anticipated growth in assets, fund investments in loans and
securities, and for general corporate purposes.
NOTE 16 -- REGULATORY MATTERS
Mercantile and the Bank are subject to regulatory capital requirements
administered by federal banking agencies. Capital adequacy guidelines and prompt
corrective action regulations involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items calculated under regulatory
accounting practices. Capital amounts and classifications are also subject to
qualitative judgments by regulators about components, risk weightings, and other
factors, and the regulators can lower classifications in certain cases. Failure
to meet various capital requirements can initiate regulatory action that could
have a direct material effect on the financial statements.
The prompt corrective action regulations provide five classifications,
including well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized, although these
terms are not used to represent overall financial condition. If adequately
capitalized, regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required.
F-25
88
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Actual capital levels (in thousands) and minimum required levels for
Mercantile and the Bank were:
MINIMUM REQUIRED
TO BE WELL
MINIMUM REQUIRED CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION REGULATIONS
---------------- ------------------ ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- -------- ------ -------- ------
June 30, 2001 (Unaudited)
Total capital (to risk
weighted assets)
Consolidated........ $63,322 10.8% $46,829 8.0% $58,536 10.0%
Bank................ 61,024 10.5 46,653 8.0 58,316 10.0
Tier 1 capital (to risk
weighted assets)
Consolidated........ 53,339 9.1 23,420 4.0 35,130 6.0
Bank................ 53,733 9.2 23,334 4.0 35,000 6.0
Tier 1 capital (to
average assets)
Consolidated........ 53,339 9.3 23,036 4.0 28,795 5.0
Bank................ 53,733 9.4 22,951 4.0 28,688 5.0
December 31, 2000
Total capital (to risk
weighted assets)
Consolidated........ $53,685 11.0% $39,163 8.0% $48,953 10.0%
Bank................ 51,596 10.6 39,017 8.0 48,771 10.0
Tier 1 capital (to risk
weighted assets)
Consolidated........ 42,085 8.6 19,589 4.0 29,383 6.0
Bank................ 45,497 9.3 19,517 4.0 29,275 6.0
Tier 1 capital (to
average assets)
Consolidated........ 42,085 8.6 19,601 4.0 24,502 5.0
Bank................ 45,497 9.3 19,528 4.0 24,410 5.0
December 31, 1999
Total capital (to risk
weighted assets)
Consolidated........ $49,275 13.7% $28,830 8.0% $36,038 10.0%
Bank................ 47,402 13.2 28,714 8.0 35,893 10.0
Tier 1 capital (to risk
weighted assets)
Consolidated........ 38,359 10.6 14,420 4.0 21,630 6.0
Bank................ 42,914 12.0 14,363 4.0 21,544 6.0
Tier 1 capital (to
average assets)
Consolidated........ 38,359 10.9 14,097 4.0 17,621 5.0
Bank................ 42,914 12.2 14,042 4.0 17,554 5.0
F-26
89
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Bank was categorized as well capitalized at June 30, 2001 (unaudited)
and year-end 2000 and 1999.
Federal and state banking laws and regulations place certain restrictions
on the amount of dividends the Bank can transfer to Mercantile and on the
capital levels that must be maintained. At year-end 2000, under the most
restrictive of these regulations (to remain well capitalized), the Bank could
distribute approximately $2,825,000 to Mercantile as dividends without prior
regulatory approval.
The capital levels as of June 30, 2001 (unaudited), December 31, 2000 and
December 31, 1999 include an adjustment for the 1.6 million trust preferred
securities issued by MBWM Capital Trust I in September 1999 subject to certain
limitations. Federal Reserve guidelines limit the amount of trust preferred
securities which can be included in Tier 1 capital of Mercantile to 25% of total
Tier 1 capital. As of June 30, 2001 (unaudited), December 31, 2000 and December
31, 1999, approximately $13.3 million, $10.5 million and $9.6 million of the
$16.0 million of the trust preferred securities were included as Tier 1 capital
of Mercantile, respectively. The remaining dollar amounts are included as Tier 2
capital, a component of risk-based capital. The trust preferred securities are
used to support Mercantile's current capital position allowing for future growth
and increased common shareholder value.
NOTE 17 -- OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) components and related taxes were as
follows.
SIX MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31,
------------------------- -----------------------------------
2001 2000 2000 1999 1998
----------- ----------- ---------- ----------- --------
(UNAUDITED) (UNAUDITED)
Unrealized holding
gains and losses on
available-for-sale
securities......... $330,700 $(71,562) 1,378,885 $(1,262,733) $ 53,866
Reclassification
adjustments for
gains and losses
later recognized in
income............. (99,594) 275,321 275,321 0 (128)
-------- -------- ---------- ----------- --------
Net unrealized gains
and losses......... 231,106 203,759 1,654,206 (1,262,733) 53,738
Tax effect............ (78,576) (69,278) (562,430) 429,329 (18,721)
-------- -------- ---------- ----------- --------
Other comprehensive
income (loss)......... $152,530 $134,481 $1,091,776 $ (833,404) $ 35,467
======== ======== ========== =========== ========
F-27
90
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 18 -- QUARTERLY FINANCIAL DATA (UNAUDITED)
EARNINGS PER
SHARE BEFORE
CUMULATIVE
INCOME BEFORE EFFECT OF
CUMULATIVE CHANGE IN
EFFECT OF ACCOUNTING
CHANGE IN PRINCIPLE
INTEREST NET INTEREST ACCOUNTING NET ---------------
INCOME INCOME PRINCIPLE INCOME BASIC DILUTED
----------- ------------ ------------- -------- ----- -------
2001
First quarter...... $10,855,416 $3,461,743 $915,451 $915,451 $0.34 $0.34
Second quarter..... 11,011,476 3,697,725 776,729 776,729 0.25 0.25
2000
First quarter...... $ 7,864,181 $2,797,414 $500,292 $500,292 $0.19 $0.19
Second quarter..... 8,848,268 3,004,000 636,472 636,472 0.25 0.25
Third quarter...... 9,741,242 3,133,073 778,160 778,160 0.30 0.30
Fourth quarter..... 10,381,957 3,340,885 879,643 879,643 0.34 0.33
1999
First quarter...... $ 4,531,195 $1,929,778 $393,901 $351,691 $0.15 $0.15
Second quarter..... 5,212,444 2,264,714 503,472 503,472 0.19 0.19
Third quarter...... 6,111,378 2,591,024 562,340 562,340 0.22 0.22
Fourth quarter..... 6,911,682 2,650,763 683,254 683,254 0.27 0.26
F-28
91
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 19 -- MERCANTILE BANK CORPORATION (PARENT COMPANY ONLY)
CONDENSED FINANCIAL STATEMENTS
Following are condensed parent company only financial statements.
CONDENSED BALANCE SHEETS
DECEMBER 31,
JUNE 30, --------------------------
2001 2000 1999
----------- ----------- -----------
(UNAUDITED)
ASSETS
Cash and cash equivalents......... $ 455,868 $ 626,986 $ 671,235
Investment in subsidiaries........ 54,681,254 46,291,805 42,617,182
Other assets...................... 2,166,718 1,800,569 1,533,198
----------- ----------- -----------
Total assets................... $57,303,840 $48,719,360 $44,821,615
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities....................... $ 361,675 $ 370,624 $ 358,896
Guaranteed preferred beneficial
interests in the Corporation's
subordinated debentures........ 16,494,850 16,494,850 16,494,850
Shareholders' equity.............. 40,447,315 31,853,886 27,967,869
----------- ----------- -----------
Total liabilities and
shareholders' equity...... $57,303,840 $48,719,360 $44,821,615
=========== =========== ===========
F-29
92
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED STATEMENTS OF INCOME
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
------------------------- -------------------------------------
2001 2000 2000 1999 1998
----------- ----------- ---------- ---------- -----------
(UNAUDITED) (UNAUDITED)
Income
Dividends from
subsidiaries....... $ 791,753 $ 791,753 $1,583,506 $ 123,162 $ 0
Other................. 11,579 13,553 29,663 33,348 28,868
---------- ---------- ---------- ---------- -----------
Total income....... 803,332 805,306 1,613,169 156,510 28,868
Expenses
Interest expense...... 808,739 808,650 1,617,300 468,316 0
Other operating
expenses........... 292,082 224,593 433,149 415,018 187,797
---------- ---------- ---------- ---------- -----------
Total expenses..... 1,100,821 1,033,243 2,050,449 883,334 187,797
---------- ---------- ---------- ---------- -----------
INCOME (LOSS) BEFORE
INCOME TAX AND EQUITY
IN UNDISTRIBUTED NET
INCOME (LOSS) OF
SUBSIDIARIES.......... (297,489) (227,937) (437,280) (726,824) (158,929)
Federal income tax
expense............... (359,000) (324,000) (649,000) (420,000) 0
Equity in undistributed
net income (loss) of
subsidiary............ 1,630,669 1,040,701 2,582,847 2,407,581 (950,118)
---------- ---------- ---------- ---------- -----------
INCOME (LOSS) BEFORE
CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING
PRINCIPLE............. 1,692,180 1,136,764 2,794,567 2,142,967 (1,109,047)
Cumulative effect of
change in accounting
principle (net of
applicable taxes)..... 0 0 0 (42,210) 0
---------- ---------- ---------- ---------- -----------
NET INCOME (LOSS)....... $1,692,180 $1,136,764 $2,794,567 $2,100,757 $(1,109,047)
========== ========== ========== ========== ===========
F-30
93
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
------------------------- -----------------------------------------
2001 2000 2000 1999 1998
----------- ----------- ----------- ------------ ------------
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income (loss)............ $ 1,692,180 $ 1,136,764 $ 2,794,567 $ 2,100,757 $ (1,109,047)
Adjustments to reconcile net
income (loss) to net cash
from operating activities
Equity in undistributed
(income) loss of
subsidiary............... (1,630,669) (1,040,701) (2,582,847) (2,407,581) 950,118
Capital investment into
Mercantile Bank of West
Michigan................. (6,606,250) 0 0 (14,828,112) (13,771,888)
Change in other assets..... (366,149) 26,487 (267,371) (1,451,293) 44,640
Change in other
liabilities.............. (8,949) (8,698) 11,728 347,396 (41,405)
----------- ----------- ----------- ------------ ------------
Net cash from operating
activities............ (6,919,837) 113,852 (43,923) (16,238,833) (13,927,582)
CASH FLOWS FROM FINANCING
ACTIVITIES
Fractional shares paid....... 0 0 (326) 0 0
Proceeds from the sale of
trust preferred securities
and issuance of
debentures................. 0 0 0 16,494,850 0
Investment in common stock of
MBWM Capital Trust I....... 0 0 0 (494,850) 0
Proceeds from sale of common
stock...................... 6,748,719 0 0 0 14,300,826
----------- ----------- ----------- ------------ ------------
Net cash from financing
activities............ 6,748,719 0 (326) 16,000,000 14,300,826
----------- ----------- ----------- ------------ ------------
Net change in cash and cash
equivalents.................. (171,118) 113,852 (44,249) (238,833) 373,244
Cash and cash equivalents at
beginning of period.......... 626,986 671,235 671,235 910,068 536,824
----------- ----------- ----------- ------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD................ $ 455,868 $ 785,087 $ 626,986 $ 671,235 $ 910,068
=========== =========== =========== ============ ============
F-31
94
------------------------------------------------------
------------------------------------------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.................. 1
Selected Consolidated Financial
Data.............................. 5
Risk Factors........................ 7
Use of Proceeds..................... 11
Capitalization...................... 12
Market for Common Stock............. 13
Dividend Policy..................... 13
Forward-Looking Statements.......... 14
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 15
Business............................ 40
Description of Capital Stock........ 50
Underwriting........................ 56
Legal Matters....................... 58
Experts............................. 58
Where You Can Find More
Information....................... 58
Incorporation of Certain Information
by Reference...................... 58
Index to Consolidated Financial
Statements........................ F-1
- - YOU SHOULD ONLY RELY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE
IN THIS PROSPECTUS. WE HAVE NOT, AND OUR UNDERWRITERS HAVE NOT, AUTHORIZED ANY
PERSON TO PROVIDE YOU WITH DIFFERENT INFORMATION. IF ANYONE PROVIDES YOU WITH
DIFFERENT OR INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON IT.
- - WE ARE NOT, AND OUR UNDERWRITERS ARE NOT, MAKING AN OFFER TO SELL THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
- - YOU SHOULD ASSUME THAT THE INFORMATION APPEARING IN THIS PROSPECTUS IS
ACCURATE AS OF THE DATE ON THE FRONT COVER OF THIS PROSPECTUS ONLY.
- - THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF
ANY OFFER TO BUY, ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT
RELATES.
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
1,200,000 SHARES
[MERCANTILE LOGO]
MERCANTILE BANK CORPORATION
COMMON STOCK
-------------------------
PROSPECTUS
, 2001
-------------------------
STIFEL, NICOLAUS & COMPANY
INCORPORATED
HOWE BARNES INVESTMENTS, INC.
TUCKER ANTHONY SUTRO
CAPITAL MARKETS
------------------------------------------------------
------------------------------------------------------
95
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses payable in connection
with the sale and distribution of the securities being registered, other than
underwriting discounts and commissions. All of such expenses will be paid by us.
The amounts shown are estimates, except for the SEC registration fee.
SEC Registration Fee........................................ $ 5,831.00
NASD fee.................................................... 2,832.00
Nasdaq fee.................................................. 14,000.00
Printing and Mailing Expenses............................... 50,000.00
Accounting Fees............................................. 35,000.00
Transfer and Registrar's Fees............................... 3,000.00
Legal Fees and Expenses..................................... 90,000.00
Blue Sky Fees and Expenses.................................. 2,000.00
Miscellaneous............................................... 9,337.00
-----------
Total.................................................. $212,000.00
===========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Indemnification
Sections 561-571 of the Michigan Business Corporation Act, as amended,
grant us broad powers to indemnify any person in connection with legal
proceedings brought against that person by reason of their present or past
status as an officer or director of our company, provided that the person acted
in good faith and in a manner he or she reasonably believed to be in or not
opposed to our best interests, and with respect to any criminal action or
proceeding, had no reasonable cause to believe his or her conduct was unlawful.
The Michigan Business Corporation Act also gives us broad powers to indemnify
defined persons against expenses and reasonable settlement payments in
connection with any action by or in the right of our company, provided the
person acted in good faith and in a manner he or she reasonably believed to be
in or not opposed to our best interests, except that no indemnification may be
made if that person is adjudged to be liable to us unless and only to the extent
the court in which that action was brought determines upon application that,
despite the adjudication, but in view of all the circumstances of the case, the
person is fairly and reasonably entitled to indemnity for reasonable expenses as
the court deems proper. In addition, to the extent that any specified person is
successful in the defense of any defined legal proceeding, we are required by
the Michigan Business Corporation Act to indemnify him against expenses,
including attorneys' fees, that are actually and reasonably incurred by him in
connection with the proceeding.
Our Articles of Incorporation provide that we shall indemnify our present
and past directors, officers, and such other persons as the Board of Directors
may authorize to the full extent permitted by law.
Our Bylaws contain indemnification provisions concerning third party
actions as well as actions in the right of the company. The Bylaws provide that
we shall indemnify any person who was or is a party or is threatened to be made
a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or
II-1
96
investigative (other than an action by or in the right of the company) by reason
of the fact that he or she is or was a director or officer of the company or
while serving as such a director or officer, is or was serving at the request of
the company as a director, officer, partner, trustee, employee or agent of
another foreign or domestic corporation, partnership, joint venture, trust or
other enterprise, whether for profit or not, against expenses (including
attorney's fees), judgments, penalties, fees and amounts paid in settlement
actually and reasonably incurred by him or her in connection with such action,
suit or proceeding if he or she acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of the company
or its shareholders and, with respect to any criminal action or proceeding, had
no reasonable cause to believe his or her conduct was unlawful.
Federal Deposit Insurance Corporation regulations impose limitations on
indemnification payments which could restrict, in certain circumstances,
payments by us or the Bank to our respective directors or officers otherwise
permitted under the Michigan Business Corporation Act or the Michigan Banking
Code.
With respect to derivative actions, the Bylaws provide that we shall
indemnify any person who was or is a party to or is threatened to be made a
party to any threatened, pending or completed action or suit by or in the right
of the company to procure a judgment in its favor by reason of the fact that he
or she is or was a director or officer of the company, or while serving as such
a director or officer, is or was serving at the request of the company as a
director, officer, partner, trustee, employee or agent of another foreign or
domestic corporation, partnership, joint venture, trust or other enterprise,
whether for profit or not, against expenses (including attorney's fees) and
amounts paid in settlement actually and reasonably incurred by him or her in
connection with the action or suit if he or she acted in good faith and in a
manner he or she reasonably believed to be in or not opposed to the best
interests of the company or its shareholders. No indemnification is provided in
the Bylaws in respect of any claim, issue or matter in which such person has
been found liable to us except to the extent that a court of competent
jurisdiction determines upon application that, despite the adjudication of
liability but in view of all circumstances of the case, such person is fairly
and reasonably entitled to indemnity for such expenses which such court shall
deem proper.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
company pursuant to the provisions discussed above or otherwise, we have been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable.
Under an insurance policy maintained by our company, our directors and
officers are insured within the limits and subject to the limitations of the
policy, against specified expenses in connection with the defense of specified
claims, actions, suits or proceedings, and specified liabilities which might be
imposed as a result of claims, actions, suits or proceedings, which may be
brought against them by reason of being or having been directors and officers of
our company.
Limitation of Director Liability
The Michigan Business Corporation Act permits corporations to limit the
personal liability of their directors in certain circumstances. Our Articles of
Incorporation provide that our directors shall not be personally liable to us or
our shareholders for monetary
II-2
97
damages for breach of the director's fiduciary duty. However, they do not
eliminate or limit the liability of a director for any breach of a duty, act or
omission for which the elimination or limitation of liability is not permitted
by the Michigan Business Corporation Act, currently including, without
limitation, the following: (1) breach of the director's duty of loyalty to us or
our shareholders; (2) acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of the law; (3) illegal loans,
distributions of dividends or assets, or stock purchases as described in Section
551(1) of the Michigan Business Corporation Act; and (4) transactions from which
the director derived an improper personal benefit.
ITEM 16. EXHIBITS
EXHIBIT NO. EXHIBIT DESCRIPTION
- ----------- -------------------
1.1 Form of Underwriting Agreement(1)
4.1 Articles III (Capital Stock) of our Articles of
Incorporation are incorporated by reference to exhibit 3.1
of our Registration Statement on Form SB-2 (Commission File
No. 333-33081) that became effective on October 23, 1997
4.2 Specimen Stock Certificate is incorporated by reference to
exhibit 4.1 of our registration statement on Form SB-2
(Commission File No. 333-33081) that became effective on
October 23, 1997
5.1 Opinion of Dickinson Wright PLLC regarding legality(1)
10.1 1997 Employee Stock Option Plan is incorporated by reference
to exhibit 10.1 of our Registration Statement on Form SB-2
(Commission File No. 333-33081) that became effective on
October 23, 1997 (management contract or compensatory plan)
10.2 Lease Agreement between us and Division Avenue Partners,
L.L.C. dated August 16, 1997, is incorporated by reference
to exhibit 10.2 of our Registration Statement on Form SB-2
(Commission File No. 333-33081) that became effective
October 23, 1997
10.3 Agreement between Fiserve Solution, Inc. and the Bank dated
September 10, 1997, is incorporated by reference to exhibit
10.3 of our Registration Statement on Form SB-2 (Commission
File No. 333-33081) that became effective on October 23,
1997
10.4 Agreement between the Bank and Visser Brothers Construction
Inc. dated November 16, 1998, on modified Standard Form of
Agreement Between Owner and Construction Manager where the
Construction Manager is also the Constructor, is
incorporated by reference to exhibit 10.4 of our Annual
Report on Form 10-KSB for the fiscal year ended December 31,
1998 (Commission File No. 333-33081)
10.5 Employment Agreement among Gerald R. Johnson, Jr., the
company and the Bank dated December 1, 1998, is incorporated
by reference to exhibit 10.5 of our Annual Report on Form
10-KSB for the fiscal year ended December 31, 1998
(Commission File No. 333-33081) (management contract or
compensatory plan)
II-3
98
EXHIBIT NO. EXHIBIT DESCRIPTION
- ----------- -------------------
10.6 Employment Agreement among Michael H. Price, the company and
the Bank dated December 1, 1998, is incorporated by
reference to exhibit 10.6 of our Annual Report on Form
10-KSB for the fiscal year ended December 31, 1998
(Commission File No. 333-33081) (management contract or
compensatory plan)
10.7 Mercantile Bank of West Michigan Deferred Compensation Plan
for Members of the Board of Directors (1999) is incorporated
by reference to exhibit 10.7 of the Registration Statement
of the company and MBWM Capital Trust I on Form SB-2
(Commission File Nos. 333-84313 and 333-84313-01) that
became effective on September 13, 1999.
10.8 Subordinated Indenture dated as of September 17, 1999
between us and Wilmington Trust Company, as Trustee,
relating to 9.60% Junior Subordinated Debentures due 2029 is
incorporated by reference to exhibit 4.1 of the Registration
Statement of the company and MBWM Capital Trust I on Form
SB-2 (Commission File Nos. 333-84313 and 333-84313-01) that
became effective on September 13, 1999)
10.9 Amended and Restated Trust Agreement dated as of September
17, 1999 among us, as depositor, Wilmington Trust Company,
as Property Trustee, Wilmington Trust Company, as Delaware
Trustee, and the Administrative Trustees is incorporated by
reference to exhibit 4.5 of the Registration Statement of
the company and MBWM Capital Trust I on Form SB-2
(Commission File Nos. 333-84313 and 333-84313-01) that
became effective on September 13, 1999
10.10 Preferred Securities Guarantee Agreement between us and
Wilmington Trust Company dated September 17, 1999, is
incorporated by reference to exhibit 4.7 of the Registration
Statement of the company and MBWM Capital Trust I on Form
SB-2 (Commission File Nos. 333-84313 and 333-84313-01) that
became effective on September 13, 1999
10.11 Agreement as to Expenses and Liabilities dated as of
September 17, 1999, between us and MBWM Capital Trust I
(included as exhibit D to exhibit 10.9)
10.12 Amended and Restated Employment Agreement dated as of
December 31, 1999, among us, the Bank and Gerald R. Johnson,
Jr., is incorporated by reference to exhibit 10.12 of our
Form 10-KSB for the fiscal year ended December 31, 1999
(Commission File No. 000-26719) (management contract or
compensatory plan)
10.13 Amended and Restated Employment Agreement dated as of
December 31, 1999, among us, the Bank and Michael H. Price,
is incorporated by reference to exhibit 10.13 of our Form
10-KSB for the fiscal year ended December 31, 1999
(Commission File No. 000-26719) (management contract or
compensatory plan)
10.14 Mercantile Bank Corporation 2000 Employee Stock Option Plan,
approved by the shareholders at the annual meeting on April
20, 2000 is incorporated by reference to exhibit 10.14 of
our Form 10-K for the fiscal year ended December 31, 2000
(Commission File No. 000-26719) (management contract or
compensatory plan)
II-4
99
EXHIBIT NO. EXHIBIT DESCRIPTION
- ----------- -------------------
10.15 Extension Agreement of Data Processing Contract between
Fiserve Solution, Inc. and the Bank dated May 12, 2000
extending the agreement between Fiserve Solution, Inc. and
the Bank dated September 10, 1997 is incorporated by
reference to exhibit 10.15 of our Form 10-K for the fiscal
year ended December 31, 2000
10.16 Amended and Restated Employment Agreement dated as of
October 12, 2000, among us, the Bank and Gerald R. Johnson,
Jr. is incorporated by reference to exhibit 10.16 of our
Form 10-K for the fiscal year ended December 31, 2000
(management contract or compensatory plan)
10.17 Amended and Restated Employment Agreement dated as of
October 12, 2000, among us, the Bank and Michael H. Price is
incorporated by reference to exhibit 10.17 of our Form 10-K
for the fiscal year ended December 31, 2000 (management
contract or compensatory plan)
10.18 Employment Agreement dated as of October 12, 2000, among us,
the Bank and Robert B. Kaminski is incorporated by reference
to exhibit 10.18 of our Form 10-K for the fiscal year ended
December 31, 2000 (management contract or compensatory plan)
10.19 Employment Agreement dated as of October 12, 2000, among us,
the Bank and Charles E. Christmas is incorporated by
reference to exhibit 10.19 of our Form 10-K for the fiscal
year ended December 31, 2000 (management contract or
compensatory plan)
10.20 Agreement between the Bank and C.D. Barnes dated October 28,
2000, on Amendment to Standard Form of Agreement Between
Owner and Construction Manager where the Construction
Manager is also the Constructor, for construction of two
Bank facilities in Wyoming, Michigan is incorporated by
reference to exhibit 10.20 of our Form 10-K for the fiscal
year ended December 31, 2000
21.1 Subsidiaries of the company is incorporated by reference to
exhibit 21 of our Form 10-K for the fiscal year ended
December 31, 2000
23.1 Consent of Crowe, Chizek and Company LLP(1)
23.2 Consent of Dickinson Wright PLLC (included in opinion filed
as exhibit 5.1)
24.1 Power of Attorney (included on signature page of this
registration statement)
- -------------------------
(1) Filed with this registration statement
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in this
registration statement shall be deemed to be a new registration statement
relating to the securities offered herein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of
II-5
100
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(c) We hereby undertake that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or Rule 497(h) under the Securities Act of 1933 shall be deemed to be
part of this registration statement as of the time it was declared
effective; and
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of these securities at
that time shall be deemed to be the initial bona fide offering thereof.
II-6
101
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Grand Rapids, State of Michigan on July 12, 2001.
MERCANTILE BANK CORPORATION
By: /s/ GERALD R. JOHNSON, JR.
----------------------------------------
Gerald R. Johnson, Jr., Chairman of
the Board and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Gerald R. Johnson, Jr. and Michael H. Price and
each of them (with full power to each of them to act alone), his true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments (including post-effective amendments)
to this registration statement, and to file the same, with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on July 12, 2001.
/s/ BETTY S. BURTON /s/ SUSAN K. JONES
- --------------------------------------- ---------------------------------------
Betty S. Burton, Director Susan K. Jones, Director
/s/ DAVID M. CASSARD /s/ LAWRENCE W. LARSEN
- --------------------------------------- ---------------------------------------
David M. Cassard, Director Lawrence W. Larsen, Director
/s/ EDWARD J. CLARK /s/ CALVIN D. MURDOCK
- --------------------------------------- ---------------------------------------
Edward J. Clark, Director Calvin D. Murdock, Director
/s/ PETER A. CORDES /s/ MICHAEL H. PRICE
- --------------------------------------- ---------------------------------------
Peter A. Cordes, Director Michael H. Price, President, Chief
Operating Officer and Director
/s/ C. JOHN GILL /s/ DALE J. VISSER
- --------------------------------------- ---------------------------------------
C. John Gill, Director Dale J. Visser, Director
/s/ DOYLE A. HAYES /s/ DONALD WILLIAMS, SR.
- --------------------------------------- ---------------------------------------
Doyle A. Hayes, Director Donald Williams, Sr., Director
/s/ DAVID M. HECHT /s/ ROBERT M. WYNALDA
- --------------------------------------- ---------------------------------------
David M. Hecht, Director Robert M. Wynalda, Director
/s/ GERALD R. JOHNSON /s/ CHARLES E. CHRISTMAS
- --------------------------------------- ---------------------------------------
Gerald R. Johnson, Jr., Chairman of the Charles E. Christmas, Senior Vice
Board, Chief Executive Officer and President, Chief Financial Officer and
Director (principal executive officer) Treasurer (principal financial and
accounting officer)
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102
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT
- ----------- -------
1.1 Form of Underwriting Agreement(1)
4.1 Articles III (Capital Stock) of our Articles of
Incorporation are incorporated by reference to exhibit 3.1
of our Registration Statement on Form SB-2 (Commission File
No. 333-33081) that became effective on October 23, 1997
4.2 Specimen Stock Certificate is incorporated by reference to
exhibit 4.1 of our registration statement on Form SB-2
(Commission File No. 333-33081) that became effective on
October 23, 1997
5.1 Opinion of Dickinson Wright PLLC regarding legality(1)
10.1 1997 Employee Stock Option Plan is incorporated by reference
to exhibit 10.1 of our Registration Statement on Form SB-2
(Commission File No. 333-33081) that became effective on
October 23, 1997 (management contract or compensatory plan)
10.2 Lease Agreement between us and Division Avenue Partners,
L.L.C. dated August 16, 1997, is incorporated by reference
to exhibit 10.2 of our Registration Statement on Form SB-2
(Commission File No. 333-33081) that became effective
October 23, 1997
10.3 Agreement between Fiserve Solution, Inc. and the Bank dated
September 10, 1997, is incorporated by reference to exhibit
10.3 of our Registration Statement on Form SB-2 (Commission
File No. 333-33081) that became effective on October 23,
1997
10.4 Agreement between the Bank and Visser Brothers Construction
Inc. dated November 16, 1998, on modified Standard Form of
Agreement Between Owner and Construction Manager where the
Construction Manager is also the Constructor, is
incorporated by reference to exhibit 10.4 of our Annual
Report on Form 10-KSB for the fiscal year ended December 31,
1998 (Commission File No. 333-33081)
10.5 Employment Agreement among Gerald R. Johnson, Jr., the
company and the Bank dated December 1, 1998, is incorporated
by reference to exhibit 10.5 of our Annual Report on Form
10-KSB for the fiscal year ended December 31, 1998
(Commission File No. 333-33081) (management contract or
compensatory plan)
10.6 Employment Agreement among Michael H. Price, the company and
the Bank dated December 1, 1998, is incorporated by
reference to exhibit 10.6 of our Annual Report on Form
10-KSB for the fiscal year ended December 31, 1998
(Commission File No. 333-33081) (management contract or
compensatory plan)
10.7 Mercantile Bank of West Michigan Deferred Compensation Plan
for Members of the Board of Directors (1999) is incorporated
by reference to exhibit 10.7 of the Registration Statement
of the company and MBWM Capital Trust I on Form SB-2
(Commission File Nos. 333-84313 and 333-84313-01) that
became effective on September 13, 1999.
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103
EXHIBIT NO. EXHIBIT
- ----------- -------
10.8 Subordinated Indenture dated as of September 17, 1999
between us and Wilmington Trust Company, as Trustee,
relating to 9.60% Junior Subordinated Debentures due 2029 is
incorporated by reference to exhibit 4.1 of the Registration
Statement of the company and MBWM Capital Trust I on Form
SB-2 (Commission File Nos. 333-84313 and 333-84313-01) that
became effective on September 13, 1999)
10.9 Amended and Restated Trust Agreement dated as of September
17, 1999 among us, as depositor, Wilmington Trust Company,
as Property Trustee, Wilmington Trust Company, as Delaware
Trustee, and the Administrative Trustees is incorporated by
reference to exhibit 4.5 of the Registration Statement of
the company and MBWM Capital Trust I on Form SB-2
(Commission File Nos. 333-84313 and 333-84313-01) that
became effective on September 13, 1999
10.10 Preferred Securities Guarantee Agreement between us and
Wilmington Trust Company dated September 17, 1999, is
incorporated by reference to exhibit 4.7 of the Registration
Statement of the company and MBWM Capital Trust I on Form
SB-2 (Commission File Nos. 333-84313 and 333-84313-01) that
became effective on September 13, 1999
10.11 Agreement as to Expenses and Liabilities dated as of
September 17, 1999, between us and MBWM Capital Trust I
(included as exhibit D to exhibit 10.9)
10.12 Amended and Restated Employment Agreement dated as of
December 31, 1999, among us, the Bank and Gerald R. Johnson,
Jr., is incorporated by reference to exhibit 10.12 of our
Form 10-KSB for the fiscal year ended December 31, 1999
(Commission File No. 000-26719) (management contract or
compensatory plan)
10.13 Amended and Restated Employment Agreement dated as of
December 31, 1999, among us, the Bank and Michael H. Price,
is incorporated by reference to exhibit 10.13 of our Form
10-KSB for the fiscal year ended December 31, 1999
(Commission File No. 000-26719) (management contract or
compensatory plan)
10.14 Mercantile Bank Corporation 2000 Employee Stock Option Plan,
approved by the shareholders at the annual meeting on April
20, 2000 is incorporated by reference to exhibit 10.14 of
our Form 10-K for the fiscal year ended December 31, 2000
(Commission File No. 000-26719) (management contract or
compensatory plan)
10.15 Extension Agreement of Data Processing Contract between
Fiserve Solution, Inc. and the Bank dated May 12, 2000
extending the agreement between Fiserve Solution, Inc. and
the Bank dated September 10, 1997 is incorporated by
reference to exhibit 10.15 of our Form 10-K for the fiscal
year ended December 31, 2000
10.16 Amended and Restated Employment Agreement dated as of
October 12, 2000, among us, the Bank and Gerald R. Johnson,
Jr. is incorporated by reference to exhibit 10.16 of our
Form 10-K for the fiscal year ended December 31, 2000
(management contract or compensatory plan)
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104
EXHIBIT NO. EXHIBIT
- ----------- -------
10.17 Amended and Restated Employment Agreement dated as of
October 12, 2000, among us, the Bank and Michael H. Price is
incorporated by reference to exhibit 10.17 of our Form 10-K
for the fiscal year ended December 31, 2000 (management
contract or compensatory plan)
10.18 Employment Agreement dated as of October 12, 2000, among us,
the Bank and Robert B. Kaminski is incorporated by reference
to exhibit 10.18 of our Form 10-K for the fiscal year ended
December 31, 2000 (management contract or compensatory plan)
10.19 Employment Agreement dated as of October 12, 2000, among us,
the Bank and Charles E. Christmas is incorporated by
reference to exhibit 10.19 of our Form 10-K for the fiscal
year ended December 31, 2000 (management contract or
compensatory plan)
10.20 Agreement between the Bank and C.D. Barnes dated October 28,
2000, on Amendment to Standard Form of Agreement Between
Owner and Construction Manager where the Construction
Manager is also the Constructor, for construction of two
Bank facilities in Wyoming, Michigan is incorporated by
reference to exhibit 10.20 of our Form 10-K for the fiscal
year ended December 31, 2000
21.1 Subsidiaries of the company is incorporated by reference to
exhibit 21 of our Form 10-K for the fiscal year ended
December 31, 2000
23.1 Consent of Crowe, Chizek and Company LLP(1)
23.2 Consent of Dickinson Wright PLLC (included in opinion filed
as exhibit 5.1)
24.1 Power of Attorney (included on signature page of this
registration statement)
- -------------------------
(1) Filed with this registration statement
II-10