Mission Statement The mission of Mercantile Bank of West Michigan is to provide finan- cial products and services in a highly professional and personalized manner. We recognize that our most important partners are our cus- tomers. We will satisfy our customers by delivering top quality service that distinguishes us from our competitors. Our employees are our most valuable asset. We strive to hire excep- tional team members and are committed to maintaining an environ- ment of growth and development. We recognize the importance of being strong supporters of the diverse communities we serve, and pledge our commitment to making them stronger. We believe that fulfilling our mission to our customers, employees and community will allow us to reward our shareholders with an excellent return on their investment in Mercantile Bank. ® 5650 Byron Center Avenue SW Wyoming, MI 49519 616.406.3000 www.mercbank.com 2135-AR-05 The Right Director s. The Right Direction. ® 2004 ANNUAL REPORT Letter to Shareholders We are pleased to report another exceptional year for Mercantile Bank Corporation and its shareholders. Once again, our company has recorded impressive results in earnings, earnings growth, asset growth and asset quality. Once again, we have leveraged existing customer relationships into additional profitability, and we have increased our market share relative to competitors. Once again, we have taken steps to strengthen and expand our infrastructure.This year, we ventured into a new geographic market and continued construction of our new headquarters building. So Mercantile continues to move in the right direction. Our trajectory continues to reflect the strong momentum depicted in our pyramid logo, with its constant reach upward. 2 Of course, it’s one thing to express a growth strategy in a logo. It’s quite another to create, implement, pursue and monitor a strategy that works in real life. We are fortunate to have assembled a Board of Directors that assumes hands-on responsibility for setting our strategic direction – and for ensuring that all of us follow that direction, day in and day out. You’ll meet our Directors throughout these pages. All of them have encountered great challenges and achieved great successes in their lives, and their experiences have helped shape the character of Mercantile Bank Corporation. They’ve built their own businesses, so they’ve made sure Mercantile is the best it can be at meeting the needs of the business owner. They believe service is the ultimate differentiator, so they’ve insisted that ours should stand head and shoulders above the rest. Gerald JJohnson, CChairman && CCEO, MMercantile BBank CCorporation: Jerry founded Mercantile Bank from his kitchen table in 1997 after serving as Chairman and CEO of another local bank for 10 years. He is also They are committed to integrity, creativity, diver- involved in numerous philanthropic activities. sity and philanthropy in their own Merle PPrins, RRetired BBanking EExecutive: Merle has been a tireless advo- dealings, so they’ve committed our bank to the same. cate for Holland-area businesses and non-profit organizations, both Perhaps most importantly, they are all residents of West Michigan. Their lives and livelihoods are woven into the fabric of this community. And their knowledge of local people, companies, economies, opportunities and traditions is before and after his 1998 retirement from another area bank. He joined the Mercantile Board in 2004. Michael PPrice, PPresident && CCOO, MMercantile BBank CCorporation: An orig- inal employee of Mercantile Bank, Mike has more than 20 years of com- mercial banking experience – many working alongside Jerry Johnson. woven into the fabric of Mercantile. Mike is active in many community service organizations. All of this sets our Board – and our company– apart from the competition. All of this has contributed to another banner year for Mercantile Bank Corporation. 3 $1.5 Billion . . . and Other Milestones It took Mercantile Bank Corporation roughly This performance contributed to record net income five-and-a-half years to achieve $1 billion in assets. of $13.7 million in 2004. This is an increase of It took just another 19 months after that to reach 37% from the $10 million earned in 2003. the next significant milestone, as total assets reached Excluding a one-time charge of $845,000 $1.5 billion at December 31, 2004. ($548,000 after-tax) associated with refinancing our The $1.5-billion-figure is an increase of $16.0 million trust preferred securities issued in 1999, $332.8 million, or 27.7%, from last year. This increase net income was $14.3 million, a 42.5% increase over was essentially driven by loan growth (up $281.2 mil- 2003, and fully diluted earnings per share were $1.94, lion, or 27.1%), which was primarily funded by an an increase of 20.5%. This significant increase in increase in deposits (up $256.3 million, or 28.4%). earnings per share was realized notwithstanding our common stock offering in the 4th quarter of EARNINGS PER SHARE GROWTH (SINCE INCEPTION) 3,041 3,014 2,318 5,779 6,216 4,288 $1.61 $1.34 7,354 $1.87 $0.92 $1.04 $0.68 $0.48 1998 1999 2000 2001 2002 2003 2004 Fully Diluted EPS Presented in Accordance with GAAP Average Shares Outstanding (000) 4 2003 which increased average fully diluted shares outstanding by 1.1 million, or 18.3%. With regard to our trust preferred securities, in the last four months of 2004 we were able to redeem and refinance this $16 million issue at a substantially lower rate of interest. We also issued an additional $16 million in trust preferred securities to take advantage of the lower interest rates available and to help fund our continued strong growth without the need to immediately issue additional common equity. Asset quality, a core strength of Mercantile Bank Corporation, remained strong even as the local economy began to show more signs of growth. Net charge-offs for 2004 were $1.2 million, or 0.10% of average loans. Non-performing assets were David HHecht, AAttorney: David’s 42-year law career has included serving as managing partner of his own firms. More recently, he 0.19% of total assets at December 31, 2004, compared with has been managing legal affairs for several Grand Rapids area phi- 0.20% at September 30, 2004, and 0.15% at December 31, lanthropists and foundations. 2003. These figures place us at or near the top of our peer group banks in terms of asset quality. Betty BBurton, CConsultant: The former owner and CEO of a busi- ness forms company, Betty now devotes much of her time to community activism. She is a trustee of both the Grand Valley State University and Western Michigan University Foundations. David CCassard, PPresident, TThe WWaters CCorporation: The Waters Corporation owns and operates commercial real estate proper- ties in the Grand Rapids area. David is also a member of the Downtown Development Authority and Downtown Improvement District Board. 5 Mercantile on the Move In October 2004, we opened a full-service Banking can serve additional lakeshore communities. Our Center in Holland, Michigan. This lakeshore experience in Grand Rapids has proven that our community is located 30 minutes southwest of reach can extend far beyond our physical locations – Grand Rapids. While Holland is a smaller city than thanks to Internet banking, telephone banking, Grand Rapids, it is home to a broad mix of small courier service and always-on-the-go lenders, calling and mid-sized businesses – the kinds of companies that officers and branch managers. have fueled our dramatic growth thus far. Indeed, we had been serving a number of Holland Holland is also the “gateway” from which we customers long before we broke ground on the 30,000- ANNUAL ASSET ENDING BALANCES SINCE INCEPTION (000) $1,550,000 $1,500,000 $1,450,000 $1,400,000 $1,350,000 $1,300,000 $1,250,000 $1,200,000 $1,150,000 $1,100,000 $1,050,000 $1,000,000 $950,000 $900,000 $850,000 $800,000 $750,000 $700,000 $650,000 $600,000 $550,000 $500,000 $450,000 $400,000 $350,000 $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $0 6 ) S K E E W 2 ( 7 9 / 1 3 / 2 1 8 9 / 1 3 / 2 1 9 9 / 1 3 / 2 1 0 0 / 1 3 / 2 1 1 0 / 1 3 / 2 1 2 0 / 1 3 / 2 1 3 0 / 1 3 / 2 1 4 0 / 1 3 / 2 1 square-foot Banking Center, so it was clear that our services were in demand. Initial public reaction to our new facility has been enthusiastic, and we anticipate a profitable relationship with lakeshore businesses and residents. We’re also eagerly anticipating the spring 2005 opening of our new headquarters building. This four-story, 60,000-square- foot facility is located just two miles northwest of our current downtown Grand Rapids location. The new headquarters will offer ample parking along with drive-through banking capability. The interior customer service area is spacious and comfortable. With four stories of space, there is plenty of room to accommodate future growth. Our exec- utive staff, now housed in the Wyoming corporate administra- tion building, will also move to the new headquarters, as it is a Donald WWilliams, SSr., DDean EEmeritus, GGrand VValley SState UUniversity: A strong advocate for political sensitivity and equality, Don has spent more more central location and provides substantially better than 30 years in education administration – including serving as Dean of opportunities to interact with customers. Minority Affairs and Director of the Multicultural Center at GVSU. The new headquarters will raise Mercantile’s visibility and Edward CClark, CChairman/CEO, AAmerican SSeating CCompany: Ed has guid- ed this 119-year-old furniture manufacturer since 1986. He recently presence in the community, as the building overlooks the busy oversaw the renovation of one of the company’s historic manufacturing US 131 expressway. Tens of thousands of drivers will pass by sites into a multi-use development – “one of Michigan's most brilliant urban success stories.” each day, greeted by Mercantile’s distinctive architecture and signage. This will serve as a tremendous marketing tool as well Peter CCordes, PPresident && CCEO, GGWI EEngineering, IInc.: An aeronautics engineer by training, Pete became sole owner of GWI in 1991.The firm as a visual confirmation of Mercantile’s commitment to West manufactures industrial automation systems for a variety of industries Michigan. throughout the Midwest. 7 Community Bank ...Community Responsibility Our contribution to West Michigan extends far beyond physical infra- structure and banking operations, of course. We’ve always positioned ourselves as a “community bank,” and we believe this requires us to lend a helping hand to community members in need, and to help make this a better place to live for everyone. We are gratified that our employees have matched our corporate philanthropy with personal support of worthy programs. Just one example: The Kent County Tax Credit Coalition helps low-income families file their taxes and receive the refunds and credits to which they’re entitled. Last year, 15 Mercantile employees volun- teered for this effort – more volunteers than from any other financial institution in Grand Rapids. Their work helped 2,000 low-income families receive refunds/credits of $1.8 million. Hundreds of other employees spent part of last year collecting items for food banks, building houses on behalf of Habitat for Humanity, raising money for diabetes and cancer, writing letters of Lawrence LLarsen, PPresident && CCEO, CCentral IIndustrial CCorporation: Larry has owned Central Industrial, a wholesale distributor of fluid power components, since 1975. He is also an owner and director of Jet Products, Inc., an Ohio-based manufacturer of hose reels and related hydraulic products. Susan JJones, PProfessor oof MMarketing, FFerris SState UUniversity; Partner,The Callahan Group, LLC: As a business owner, educator and author, Susan has helped thousands of individuals and organizations improve their marketing prowess. Her many awards include “Marketer of the Year” and “Direct Marketing Educator of the Year.” encouragement to inner-city children, collecting clothing for homeless Calvin MMurdock, PPresident, SSF SSupply: Cal has led this wholesale distribu- city students, and much more. These efforts have helped reinforce our tor of commercial/industrial electronic components and related products since 1994. His many innovations include an Appreciation Trailer from reputation as a true community bank. which he and his crew serve lunch to customers. 8 2004 Cash Dividend These employees are just as enthusiastic and effective in their jobs at Mercantile Bank Corporation. Their efforts – in conjunction with strong oversight and support from our Board of Directors – have made 2004 another rewarding year for Mercantile shareholders. As a result, a quarterly cash dividend of $0.10 per share was declared by our Board of Directors on January 11, 2005, and paid on March 10. This represents an 11.1% increase from the previous year. Our performance in 2004 continued to validate the original business model set forth by our Board of Directors when we opened our doors seven years ago: Mercantile Bank will focus on commercial lending and quality service delivered efficiently. Dale VVisser, CChairman, VVisser BBrothers, IInc.: Dale has held various positions within his family-owned firm since 1960.Visser Brothers is a construction general contractor specializing in commercial buildings. John GGill, RRetired CChairman, GGill IIndustries, IInc.: John founded his namesake firm “with more confidence than capital” in 1964.Today, this As the local economy improves, we will continue to auto industry supplier is one of Michigan’s “101 Best Companies to reap dividends from this focus. We are currently seeing increased borrowing and deposit activities from our Work For.” Doyle HHayes, PPresident && CCEO, PPyper PProducts CCorporation: After 20 years with General Motors, Doyle started his own company in 1994. current commercial customers, and we are making major This plastics manufacturer now supplies some of the biggest names in inroads with new customers in Grand Rapids and lakeshore communities. We are confident this will serve us well as we move forward in 2005. the automotive and office furniture industries. 9 In Summary Earlier, we told you how the upward momen- tum of our pyramid logo serves as constant inspiration for our Directors, spurring them to develop and implement strategies that fuel our growth. The Directors also look to the logo as a symbol of their responsibilities. Each of the pyramid’s three sides represents one of our core constituencies: community, customers and shareholders. Our Directors are well qualified to look after the interests of these audiences. Because every Director is a member of the West Michigan community. Every Director is a Mercantile Bank customer. And every Director is a Mercantile Bank Corporation shareholder. The right Directors. The right direction. The right choice for you. On behalf of all of the Directors and employees of Mercantile Bank Corporation, we thank you for your continued support. L-R: Chuck Christmas, Jerry Johnson, Bob Kaminski, Mike Price Gerald R. Johnson, Jr. Chairman Chief Executive Officer Michael H. Price President Chief Operating Officer Robert B. Kaminski, Jr. Executive Vice President Secretary Charles E. Christmas Senior Vice President Chief Financial Officer 10 See the inside back cover for photo highlights from 2004. 2004 PPhoto HHighlights New YYork CCity - Jerry Johnson presided over the NASDAQ Stock Market Open on July 1, 2004, mark- ing the five-year anniversary of Mercantile Bank’s listing on the NAS- DAQ National Market. Holland - We celebrated the opening of our new Holland Banking Center with a ribbon-cutting ceremony on November 18, 2004. Grand RRapids - Our new headquarters site is adjacent to one of Michigan’s busiest expressways, enabling thousands of drivers – and potential customers – to monitor our construction progress. 1 1