SECURITIES

The amortized cost and fair value of available for sale securities and the related pre-tax gross unrealized gains and losses recognized in accumulated other comprehensive income are as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
March 31, 2017
U.S. Government agency debt obligations	$	162,923,000	$	73,000	$	(6,985,000	)	$	156,011,000
Mortgage-backed securities		43,525,000		472,000		(293,000	)		43,704,000
Municipal general obligation bonds		123,235,000		496,000		(1,201,000	)		122,530,000
Municipal revenue bonds		8,295,000		22,000		(78,000	)		8,239,000
Other investments		1,986,000		0		(29,000	)		1,957,000

	$	339,964,000	$	1,063,000	$	(8,586,000	)	$	332,441,000

December 31, 2016
U.S. Government agency debt obligations	$	159,271,000	$	106,000	$	(7,337,000	)	$	152,040,000
Mortgage-backed securities		47,329,000		486,000		(423,000	)		47,392,000
Municipal general obligation bonds		120,284,000		312,000		(1,549,000	)		119,047,000
Municipal revenue bonds		7,699,000		23,000		(91,000	)		7,631,000
Other investments		1,979,000		0		(29,000	)		1,950,000

	$	336,562,000	$	927,000	$	(9,429,000	)	$	328,060,000

(Continued)

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

SECURITIES

(Continued)

Securities with unrealized losses at

March

31,

2017

and

December

31,

2016,

aggregated by investment category and length of time that individual securities have been in a continuous loss position, are as follows:

	Less than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Loss		Value		Loss		Value		Loss
March 31, 2017
U.S. Government agency debt obligations	$	123,657,000	$	6,850,000	$	4,108,000	$	135,000	$	127,765,000	$	6,985,000
Mortgage-backed securities		19,107,000		145,000		15,498,000		148,000		34,605,000		293,000
Municipal general obligation bonds		46,728,000		1,047,000		8,805,000		154,000		55,533,000		1,201,000
Municipal revenue bonds		1,246,000		78,000		0		0		1,246,000		78,000
Other investments		1,486,000		29,000		0		0		1,486,000		29,000

	$	192,224,000	$	8,149,000	$	28,411,000	$	437,000	$	220,635,000	$	8,586,000

	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
December 31, 2016
U.S. Government agency debt obligations	$	110,160,000	$	7,172,000	$	5,073,000	$	165,000	$	115,233,000	$	7,337,000
Mortgage-backed securities		3,670,000		4,000		37,072,000		419,000		40,742,000		423,000
Municipal general obligation bonds		65,895,000		1,360,000		27,734,000		189,000		93,629,000		1,549,000
Municipal revenue bonds		1,921,000		90,000		206,000		1,000		2,127,000		91,000
Other investments		1,479,000		29,000		0		0		1,479,000		29,000

	$	183,125,000	$	8,655,000	$	70,085,000	$	774,000	$	253,210,000	$	9,429,000

(Continued)

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

SECURITIES

(Continued)

We evaluate securities for other-than-temporary impairment at least on a quarterly basis. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability we have to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. For those debt securities whose fair value is less than their amortized cost basis, we also consider our intent to sell the security, whether it is more likely than not that we will be required to sell the security before recovery and if we do not expect to recover the entire amortized cost basis of the security. In analyzing an issuer’s financial condition, we

may

consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred and the results of reviews of the issuer’s financial condition.

March

31,

2017,

316

debt securities and

one

mutual fund with fair values totaling

$221

million have unrealized losses aggregating

$8.6

million. After we considered whether the securities were issued by the federal government or its agencies and whether downgrades by bond rating agencies had occurred, we determined that the unrealized losses were due to changing interest rate environments. As we do not intend to sell our debt securities before recovery of their cost basis and we believe it is more likely than not that we will not be required to sell our debt securities before recovery of the cost basis, no unrealized losses are deemed to be other-than-temporary.

The amortized cost and fair value of debt securities at

March

31,

2017,

by maturity, are shown in the following table. The contractual maturity is utilized 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, primarily mortgage-backed securities, are shown separately. Weighted average yields are also reflected, with yields for municipal securities shown at their tax equivalent yield.

	Weighted
	Average		Amortized		Fair
	Yield (%)		Cost		Value

Due in 2017		1.45	$	30,644,000	$	30,670,000
Due in 2018 through 2022		2.24		97,092,000		97,132,000
Due in 2023 through 2027		2.68		93,216,000		90,060,000
Due in 2028 and beyond		2.84		73,501,000		68,918,000
Mortgage-backed securities		1.85		43,525,000		43,704,000
Other investments		0.65		1,986,000		1,957,000

Total available for sale securities		2.36	$	339,964,000	$	332,441,000

(Continued)

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

SECURITIES

(Continued)

Securities issued by the State of Michigan and all its political subdivisions had a combined amortized cost of

$113

million and

$109

million at

March

31,

2017

and

December

31,

2016,

respectively, with estimated market values of

$112

million and

$107

million, respectively. Securities issued by all other states and their political subdivisions had a combined amortized cost of

$18.7

million and

$19.5

million at

March

31,

2017

and

December

31,

2016,

respectively, with estimated market values of

$18.8

million and

$19.5

million, respectively. Total securities of any other specific issuer, other than the U.S. Government and its agencies and the State of Michigan and all its political subdivisions, did not exceed

10%

of shareholders’ equity.

The carrying value of U.S. Government agency debt obligations and mortgage-backed securities that are pledged to secure repurchase agreements was

$127

million and

$132

million at

March

31,

2017

and

December

31,

2016,

respectively. Investments in Federal Home Loan Bank stock are restricted and

may

only be resold or redeemed by the issuer.